Federal Reserve Chairman Powell said just last week that the United States is experiencing a remarkably positive set of economic circumstances.

ISM non-manufacturing report for September came in at 59.8 a mere 2 points lower than the record setting number for August. Remember any reading above 50 is considered a growing economy.

Latest Leading Economic Indicators (LEI) numbers are out and continue to climb. Unemployment is low and wages are rising. Earnings and revenue growth seem to be in lock step for a majority of S&P 500 companies.

In spite of this short list of continued market positives, it seems the only 2 items making headlines the past several months are tariffs and the yield relationship between the 10 and 30 year Treasury bond. Long term bonds typically pay higher rates of interest primarily due to the longer holding period. Until last week, the yield between the 10 year and 30 year were getting so close to being the same (called flattening) it looked like they might invert. In the past when that has happened, it signaled a recession was just around the corner. Well, the fear of that flattening or inverting yield curve is all but history now, at least for the time being. Why? Because those interest rates that were nearing inversion are higher and spreading further apart. Now, instead of the fear of the yield curve inverting, fear has shifted to the potential for higher returns that can be achieved on safe government bonds without the risk of investing in stocks. And tariffs? I’ll refer you to my Market Update from this past July. Stay with me now and consider the following.

According to The Wall Street Journal, investors PLACED $1.2 billion into U.S. stocks and REMOVED $1.6 billion from bonds during the week of October 1st. In fact looking over the last 2 weeks, total bond OUTFLOWS hit $2.7 billion. Remember bond prices and interest rates run opposite of each other. Look, I realize stock prices are lofty and there are risks on the horizon but I would submit that this latest selling action in the bond market has had something to do with this recent spike in bond interest rates. And, according to Zack’s, China is expected to be selling $3 billion worth of U.S. bonds in the coming days or week. Do you think its possible investors could be getting out of bonds before China drives prices down even further? One final note on the earnings yield, also courtesy of Zack’s. The earnings yield (not growth) on the S&P stood at 5.25% as of the end of September, 2.5% higher than the 10 year Treasury.

There’s a lot going on all around the globe right now. Most major stock indices are down year to date with the exceptions of India, Brazil and the US. Volatility is back and the sledding hasn’t been as easy as in 2018 as it was in 2017. Fundamentals driving this bull market remain in place. Mid-term elections are just weeks away and one can only guess what those outcomes might do to volatility.

As I close, keep this thought in mind. An 800 point down day on the Dow Jones Index valued at 25,000 equates to roughly 3%. Now I’m not suggesting it be ignored. Just that it be kept in perspective. Be patient and avoid knee jerk reactions.

Until next time……..stay nimble……..be tactical and know what you own.

These are the opinions of Randy L Miles Sr and not necessarily the views of Cambridge. They are for informational purposes and not to be considered as personal investment advice.