As Good As It Gets?

Most encouraging in the short-term for bond and stock traders alike was that rates failed to rise after the payrolls data. Equity and bond markets digested the rise from 1.25% to 1.75% with some fits and starts, but that was not especially upsetting when we consider that equity markets trended flattish to higher over that period. It now appears that bond traders overshot the mark when they pushed rates to 1.75%. The 10-year is currently yielding about 1.68%, meaning that the strong employment data was deemed by bond traders to be something they could largely ignore. That was as close to an “all clear” as equity traders could get from the bond market.

So, it’s all good, right? I wouldn’t be doing my job if I simply said “yes” and moved on. I’ve learned over the years that the worst trading decisions come when complacency reigns. There are always risks lurking out there, even if they are overshadowed by rewards. Among the pitfalls are:

  • To what extent were the bond and stock moves over the prior weeks a function of quarter-end rebalancing? There is a real possibility that the lack of change in bond yields since the payrolls was more a function of an oversold than a sanguine bond market. There is also ample evidence that the rally that ended last week was the result of new money flows at the beginning of a historically good month for investors rather than a sea change in sentiment. Will those persist?
  • What are markets discounting now? After a blowout in employment data and subsequent upward revisions to economic outlooks, are investors setting a bar that is simply too high to surpass? Every outlook is seemingly rosy. What if the data fails to meet the high expectations?
  • Guess what’s coming next week? Earnings!JP Morgan kicks off the traditional start to quarterly earnings season in a bit over a week. Typically, the banks report first, though their trading results can often lead to flawed extrapolations of their results onto the major corporations ahead. As with the economic outlooks, earnings estimates are quite robust. That said, companies have tended to beat their estimates – sometimes by a wide margin. What if investor expectations – the so-called “whisper numbers” – are set at levels that fail to impress the market.
  • VIX traders saw something on the horizon yesterday. The CBOE Volatility Index rose on a stellar up move for the SPX that underlies it. Those traders took the opportunity to gird for potential movement in the coming weeks. Do they see something that others don’t?
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Disclosure: The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the ...

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