Interest Rates – Home on The Range

"Oh give me a home where the buffalo roam
Where the deer and the antelope play
Where seldom is heard a discouraging word
And the skies are not cloudy all day”

Interest Rates - What we have been saying: 

At the start of 2024, we suggested that interest rates, measured by the 10Year Treasury, had reached a peak at just above 5% and may be starting to look for a home within a range between 4% and 5% for the year.  Based on this belief, in February and March, we started communicating that investors may be able to enter into “interest rate” sensitive investments, like traded REIT’s and Treasury Bonds.  We also began adding such holdings into the Quiver Models. 

We provided readers this chart at the time:

Then, in July of this year, we updated our interest rate outlook via our Market Update and stated:

 “As we move through 2024, our focus remains on the 10-year Treasury yield, which appears to be settling into what we call a "Goldilocks" scenario. This new trading channel between 4% and 5% has held steady so far this year, potentially creating a favorable environment for rate-sensitive investments.” 

We also stated:

“If this "Goldilocks" scenario persists for a year or more, it could present opportunities for investors to maintain or even increase their exposure to rate-sensitive investments like Traded Real Estate Trusts.  However, it's crucial to remain vigilant of factors that could disrupt this delicate balance.”

We went on to specifically reference how events in the middle east and the potential for rising Oil prices could be a disruptor to the “Goldilocks” scenario.

What has happened since:

Since our last missive in the summer, the 10year continued to drift lower, reaching a low near 3.70% within the last couple of weeks as inflation and employment numbers have come in on the soft side giving credence that the Fed may have orchestrated a soft landing up until this point.  In addition, Oil prices have remained in a complacent range between $70 and $80 a barrel in spite of the tensions in the Middle East which has allowed inflation to stay at bay, for now.

Currently, it appears our Goldilocks range for rates is panning out.  With the 10yr treasury finding a low around 3.75%.  Now, we will see if future news will push rates back towards 5% as the year rounds the final corner.

As a result, the high dividend paying, rate sensitive holdings we added to our portfolios in February and March, have risen in price and paid a couple quarters of dividends.  Contributing growth to our model’s performance.

What may be in store for Interest Rates into the end of 2024 and beyond?

Historically, all markets do their best when the 10yr Treasury can remain range bound between two points for an extended period of time (more than 18 months).  Markets love this type of equilibrium in rates as it eliminates a lot of surprises and allows market participants to get into a grove with their deployment of capital. 

At this moment, barring any left field surprises, it is our belief that markets are searching out that level of equilibrium and if the economy can remain at current levels and trajectory of growth without any substantial shocks, there is a good chance we will get to the tail end of 2025, look back and realize that the 10yr treasury was able to trade in a range between approximately 3.75% and 5%.  Finding the lower range when there is “recession” concerns, or conversation of the Fed lowering rates.  Then reaching the higher range closer to 5% when “inflation”, or “world event risks”, or economic growth looks hotter than expected. 

Of course, there are a lot of alternatives that can take place, and we will need to be diligent in revising our outlook as markets develop over the next few months.  However, if our range bound theory remains intact, we will be able to continue to hold and possibly add to our rate sensitive holdings which may help our portfolios increase their dividend and income rate as we enter 2025.

We offer this updated chart so you can see what we are speaking of.

Metals – Picture Perfect Bull Market Correction?

“An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” 

Like Newton and Apples, Gold bugs are lovin 2024. 

What we have been saying about Metals in 2024:

“Our investment thesis for the 2020s is grounded in the belief that demographic trends and persistent supply/demand imbalances in commodities will lead to higher levels of inflation and potential stagflation. We see compelling reasons why this decade could mirror the 1970s in many ways, potentially positioning sectors like materials, metals, miners, and energy as top performers in investment markets by 2030.

In May, we made a strategic decision to take some profits and reduce our exposure to metals and miners, anticipating a correction. Interestingly, the subsequent correction has manifested more as a sideways movement rather than a significant downturn. This type of price action is often interpreted as a sign of underlying strength, which bodes well for the longer-term pattern we're observing in gold.

As we move into July, we're closely monitoring market behavior and stand ready to adjust our allocation accordingly.” 

And we shared this view:

What has happened since with the price of Gold, Silver and Miners?

Before we get to far, it is important to remember that Bull or rising markets tend to correct their growth in one of two ways.  Either by trading sideways for a period digesting the previous leg of growth, or by declining more deeply and quickly in price to a level of support.

Since our last missive, spot prices of metals measured by Gold, appear to be completing what looks like a picture-perfect sideways correction that started in May 2024, and is completing as Summer ends. 

What May Be Next for Metals in 2024?

While markets always have many options, we are still Bullish on metals and based on our belief systems expressed at the opening, the fundamentals we see in the world, and the technical back drop of how metal prices are trading in 2024 we have been adding back to the positions we trimmed in May, and offer you this updated view.

Energy and Oil – With all the s**t going on in the world, Why Won’t You Go Up?

If there is one frustration in our 2024 themes, it would be the reluctancy of Oil prices to rise in the face of turbulent world politics, wars, and evolving bedfellows of great concern in currency and trade (think Saudi trading oil in other currencies).  One would think with all this s**t going on, Oil would be well above $80 a barrel. 

Energy and Oil - What We Have Been Saying

From our Summer Market Minutes from the Boardroom: 

“Our January 2024 outlook for Oil prices, laid out a path that prices have largely adhered to throughout the year. This led us to increase our exposure to energy-related investments in May and June.  Our most recent chart of oil prices, updated in mid-June, shows an interesting development. The correction we saw in May, which bottomed out around $70 per barrel, appears to have set up a compelling buying opportunity in the oil sector. We're moving forward with the thesis that this price level represents a significant support, and we've established it as our "stop loss" level for our oil patch investment strategy.”

And we provided this visual in our Summer Market Minutes From The Boardroom:

Energy and Oil – What Has Happened Since and What May Be Next?

Since that Summer note, Oil prices have continued trading sideways.  Within recent weeks, with perceived weakness in the Chinese economy, along with a strange new found belief circling in the media that there could be a glut of supply coming, prices are siting just above our support and stop loss levels.  If these levels are breached with sustained trading of Oil below $68ish a barrel, we will be compelled to readjust this part of our 2024 thesis along with the exposure to the energy sector within our models.

While we can argue many of the recent points conveyed in the media on why Oil prices have been reluctant to rise as nothing more than “noise” and exactly what you would see at the bottom of a pricing cycle, the charts are the charts and discipline in risk management is more important than being right at any cost. 

Here is a visual to help put some context to the conversation:

 Equities – Time for a Correction? What We Have Been Saying

In our Summer 2024 Market Minutes, when the S&P 500 was near 5550, we offered this viewpoint on broader Equity Index markets:
"As we assess the current state of the stock market, our analysis suggests that the bull market for major index funds like the S&P 500 and Nasdaq may be showing signs of fatigue. We're observing multiple indicators of exhaustion and narrow leadership, which often precede a market correction. While it's challenging to pinpoint the exact timing, we anticipate this correction could begin within the next 5% of current market levels."

Equities – What Has Happened Since?

Volatility in markets correlated with, and measured by the S&P 500, has increased. With August starting the first few days of the month with a fast sell-off on concerns of the Yen Carry Trade. You can learn more about why the Yen Carry Trade is important and will be in the news for a while, here: Yen- Next Investment Wave.

Just as fear seemed to grab the market in the first few days of August, the window for stock buybacks before the next earnings season and a focus on how the Fed may lower rates in September helped the market spend the rest of August in recovery mode. Now, as the first week of September ends, and football begins, the market appears to have the first "impulsive" five (5) wave decline on daily charts that may indicate the correction we were expecting has begun.

Here is what we are seeing on a short-term view in recent market action:

Equities – What May Be Next In 2024

At this moment, we still believe in what we shared back in summer:

“Despite these warning signs, it's important to note that there's still considerable value within the broader equity markets. Many asset classes and sectors haven't participated in the robust growth experienced by the S&P 500 and Nasdaq, which have been heavily influenced by a handful of tech giants like Apple, Microsoft, and NVIDIA. This disparity sets the stage for a potential sector rotation in the near future.

With the chip sector now in an official selloff with SMCI dropping 60% since March, ARM Holdings falling by 40+% since July, and now Nvidia down by nearly 20% after reporting earnings at the end of August, the market is free to correct. 

This is a prime example of what happens when the “Generals” or leaders of the market get shot in their tracks.  Now we will look for signs for other sectors to benefit from sector rotation and hope some of the money leaving chips and tech will find its way to Energy, Metals and Rate Sensitive sectors. 

As a side note, Utilities along with Aerospace and Defense look to have a positive back drop of risk and reward that may also benefit from sector rotation, if it happens.

The Bottom Line

1. We are still believers that interest rates are finding a “GoldiLocks” range and rate sensitive, dividend paying investments with diligent hedging can be beneficial to some investors with the right time frame and risk tolerance.

2. We continue to lean into the belief that Metals and Miners are in a secular Bull market and recently finished a sideways correction.

3. While Oil and Energy have been a point of frustration by moving sideways rather than up, their low valuations, and high dividend yields supported by the potential for “event risk” in the world keep us believers in the sectors potential.  However, if there is much more weakness in the sectors performance, we will be forced to reduce our exposure and adjust those funds to other sectors like Utilities or Aerospace and Defense.

4. Equity markets are ripe for a correction.  While we believe the next down phase in equities will be a correction, we have to keep in mind that corrections this deep in a Bull market that started over 13 years ago can always morph into something bigger so we should stay on our toes.

Remembering Those We Have Lost

Since last summer, our clients and their families have seen a lot of loss of loved ones.  It’s been an unfortunate wave we hope is coming to an end.  We would like to recognize and pay respect to the following clients that have passed away in the past year, you all were some of our favorites to talk and laugh with.  We look forward to working with your families and keeping your memory alive.

Mike McFadden

Loraine Judd

Harry Westover

Joe (Long Time Partner of Jill Benson)

Mike Bias

Sheila Dickinson

Chuck Frazer

And the One and Only, Bill Mullen

We miss you all.