Signature Update is Signature Wealth Management's weekly e-newsletter sent to clients of Signature Wealth Management and other interested parties. It routinely includes current market and economic commentary by Richard Haskell, Sr., as well as free links to various market and economic information sites. We strive to provide relevant content on a variety of financial and economic topics. Please feel free to request information on any financial topic in which you may be interested and we will do our best to provide it to you in a timely manner. Please send a request to info@signaturewealthmanagment.com.
The following is a preview of the most recent issue of Signature Update:
Things are Exactly That Bad ... and that's good!
THE MARKET – The Yield Curve: Revisited
Even though Signature Update has discussed positive-sloping yield curves in the past, it seems appropriate to mention the shape of the current curve. Yield curves, the graphic representation of treasury yields for varying lengths of maturity, most often foretell the general direction of the stock market. A positive slope reflects higher treasury yields for longer maturities – which is exactly what one would expect – and has routinely been a precursor to prolonged equity market gains. A flat or negatively sloped curve, like the one we saw in the later part of 2007 and 2008, is indicative of a disquieted credit market and most often leads to lower stock market values.
Sometimes we misinterpret these forecasting tools and suppose they mean something other than what they’ve so accurately represented for many years. As investors, we often want to look only at the positive side of the markets and may mistake an otherwise obvious sign. This is often the case when a negatively sloping curve is suggestive of declining stock market values. As economists, we tend to be more pragmatic and are most interested in the changing economic landscape; regardless of the direction of change.
The current yield curve not only has a positive slope, but is steeper than at any time since the early 1980’s. It suggests an upward trending equities market for an extended period of time and is difficult to ignore. Recent economic updates reflecting increased consumer spending, manufacturing activity, and improving labor patterns support continued market improvement and paint a compelling picture for a profitable 2010.
One of the more positive signs we’ve seen has been the recent improvement in the US dollar, aligned with stock market gains. Divergent dollar/equities movement had become a concerning trend, and while we may continue to see more uncorrelated dollar/equities moves, it appears the trend is breaking none too soon.
The weak dollar, though good for export activity and ‘gold bugs’ has elicited concern the world over. Even without outward support from the Federal Reserve and US Treasury, the dollar has gained ground in recent weeks and the upward sloping yield curve, also an indicator of future interest rates, supports meaningful currency exchange gains and hope for moderated inflation pressures. Both offer welcome relief to consumers and investors, excepting those gold investors who may have fallen prey to opportunistic pressures in the precious metals and commodities markets.
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