Countdown to the Showdown

Our Investment Market Overview for the week ending 3^rd March included the following comment on the Dow Jones Industrial Average, the “Dow”:

“A mass of anecdotal market evidence that scream “overvalued,” such as excessive valuations; extreme bullish sentiment readings; historic lows of cash held within stock mutual-funds and excessive use of leverage, has been phenomenal, a 3285 point Dow surge since the 4^th November, which has taken out the 20,000 Dow round number only to see 21,000 hit just 22-trading days later.

Plus:

“The Dow was saved by the Queen Bee of the Federal Reserve, Janet Yellen as she singled out the danger of the central bank being too slow in boosting interest rates. She all but confirmed that the Federal Open Market Committee would increase rates for the first time this year at its March 14-15th meeting, also suggesting that it would not be the last increase in 2017, which followed similar inferences by no less than three other Fed colleagues over this week. Despite the fact that stock-markets tend to prefer falling interest rates, the Dow has romped higher since last summer regardless of an 80% surge in the 10-year Treasury Bond Yield, with the “market,” better known as the punters who are either buying or selling, either oblivious to the rate increase already achieved OR, duped by the soothing “con-fidence” alluded too by the Central Bankers,’ “that the economy is strong and that they actually control interest rates.”

So Why the Reminder?

Well, aside of presenting a single chart that belies the Fed mantra alluded to above, it also provides an “antidote” to the herds’ “triumph of reflation over deflation,” quote used by a well respected industry figure this morning, who just happens to be one of my LinkedIn connections, albeit a connection of a differing view:

At its simplest the chart shows four variables post the November “Trump rally,” with the black-dashed –line showing a break for each variable:

• The break higher for the 2-year “market yield” confirms once again that neither the Federal Reserve, or any other central bank come to that, control interest rates, they “re-act” to market rates.
• Oil, Copper and a global gold-mining index are traditional “bell-whethers’” of inflationary trends, with the first two also “proxies” for economic growth prospects. Aside of the recent break lower, they have been falling substantially for the past few years, also rather telling.

So Why the title?

There are some rather important dates and events due shortly, so you may wish about them in this week’s “Investment Markets Overview,” before the showdown expected.