Bond Markets Lead All Financial Markets

So it is very important to pay attention to what they are telling us. Whether or not the over-used cliche that "this time it is different" is or is not the case.

The US Federal Reserve will announce that they are raising interest rates by 1/4% at 2pm today. Of that there is little doubt.

What will be more important will be the pace of future interest rate increases and how they will impact economic growth into the future.The flattening of the yield curve has been something that we have been discussing (and you all may think over-discussing) lately. We certainly bring it up on our most recent weekly video (dressed in our holiday appropriate attire).

Rising interest rates will not be benign as financing record amounts of US household debt becomes more difficult without rising wage growth to help it. It cannot help but deter the consumer and the consumer is 2/3 of the US economy.

The consumer has been very confident of late and unemployment is at multi-year lows and they have been told by their President that there is better stuff yet to come. There are, however, a number of pretty smart economic minds that might argue the impact of the new tax reform on the average consumer over time is not what it is being billed as. 

The flattening of the yield curve is the real story. Bond markets are telling us that as short-term interest rates go up (without economic growth spurring inflation), that there is the potential for economic slowing (despite the current level of consumer confidence).

Stock markets appear to be ignoring the bond market's warnings and focusing on all the apparent good news (expected earnings growth, etc.), while paying limited attention to whatever bad news lurks in and behind the headlines.

We (at High Rock) know that it is folly to ignore the warning signs and will be ultra-cautious heading into 2018 as to how we want our and our client's money to be put to work.

Stronger than expected economic growth for 2017 does not necessarily guarantee stronger growth (and earnings) for 2018 and the bond market is telling us that. It is a behavioural trait of us mere mortals to expect what has transpired in the recent past to continue on into the future and many of us who have not been on the current bandwagon may feel tempted to jump on board. 

We shall resist that temptation and allow our 35 plus years of experience in financial markets to be our guide.