Weekly Market Pulse: Buy The Rumor, Sell The News

There’s an old saying on Wall Street that one should “buy the rumor, sell the news,” a pithy way to express the efficient market theorem. By the time an event arrives, whatever it may be, the market will have fully digested the news and incorporated it into current prices. And then the market will move on to anticipating the next event, large or small. What prompts this review of Wall Street folk wisdom is the most recent employment report.

The BLS reported Friday, with most markets closed, that the US added nearly 1,000,000 jobs in March, a number well above the supposed consensus of 675,000 jobs. 157,000 jobs were added to previous months via revision. It was what the market has been looking for, hoping for, the arrival of the end-of-the-virus-boom.

What is most interesting about this report was the market reaction on a day when most markets were closed. The one market that was open when the report was released was the bond market which promptly did, well, not much. Even a booming jobs report that showed job growth across multiple sectors of the economy, one that showed a rise in the participation rate and a fall in the unemployment rate, didn’t move bonds much at all. Yields ended well below the peak of earlier in the week. Buy the rumor, sell the news.

Bond yields have been rising steadily for eight months, so the direction of rates does indicate that the economic condition is improving. But the rate of change has been fairly subdued and the levels are not what we would expect if a boom were coming. What does a 1.7% 10-year Treasury note yield really mean?

One thing I’m pretty sure it doesn’t mean is that the Fed is holding down yields. They’re a big player but if the market decides to take yields higher, higher they will go. The fact that yields are at these low levels isn’t artificial and means, I think, exactly what it appears to mean. The bond market isn’t expecting a boom. In fact, I’d say that right now bond yields reflect growth expectations that are no better – and maybe quite a bit worse – than what prevailed before the virus hit.

I’d also point out that the three- and six-month rates of change for the 10-year yield have peaked. If bonds don’t sell off aggressively on the employment news this week, a bond rally is probably near, if not starting right now. Again, buy the rumor, sell the news. At market tops and bottoms, news doesn’t move markets in the expected direction.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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