WASHINGTON – Mr Market’s “lost in translation” moment actually started Wednesday and continued with a vengeance on Thursday. Until it changed directions again. We’re talking about the genuinely weird midweek stock market action that’s seen stocks rally and then back off. Particularly today. Stocks took off like a rocket Thursday as blaring headlines claimed the economy-clogging US-China tariffs were about to get cut, big time, as part of an upcoming “Part I” trade deal between both countries.
The Dow – led by Apple (trading symbol: AAPL) for obvious reasons, soared some 250 points just moments after this morning’s opening bell.
But, oops. Wait a minute. Do you read Mandarin Chinese? Apparently, quite a lot of financial writers don’t have that capacity. They, or their in-house translators must have botched their interpretation of today’s Chinese remarks proclaiming trade negotiation nirvana: a wondrous-to-behold, mutual goodwill tariff reduction between the US and China. As the day wore on, most writers and investors gradually learned that the exciting news from the Chi-coms was maybe not all that exciting.
The Tyler Twins of ZeroHedge put it this way.
“A mis-translated story from China overnight on removing tariffs sparked a melt-up in stocks, bond yields, oil, and the dollar today (and slammed precious metals).”
Remember that classic film, “Lost in Translation”?
Shades of that classic 2003 Sofia Coppola movie, Lost in Translation, starring Bill Murray and… wait for it … an unknown young actress named Scarlett Johansson as would-be romantic leads. Turns out today’s “lost in translation” US-China tariff related trading nonsense proved far from romantic for Wall Street’s frustrated, jerked-around traders. (And home gamers like yours truly.) Bonds tanked, shorts got squeezed big time in stocks, and everything went in different directions from where gurus and TV blow dries said they’d go.
Like Murray’s and Johansson’s lost magic moment, Wall Streeters ended the trading day in what looked like resigned frustration. Love affairs with favored investments failed to blossom.
That inverted yield curve finally un-inverted, and nobody knows quite what to do next
As we noted in an earlier article, after a brief, positive feint last week, the inverted yield curve plaguing both US Treasurys and the bond market in general suddenly managed to right-size itself this week and stay in the proper configurations. Bond yields slid back to where they belonged, with higher maturities offering higher yields and shorter maturities offering lower returns. Just as God has always ordained.
As the shift to normalcy became more clear, bond yields at all levels began to rise, a little bit each day. And a little is a lot in the wonderfully boring world of bonds.
The reason that the effective yields of already existing bonds “rise” is that the price to buy them from another owner drops. In other words, yield moves inversely to the price of the underlying bond.
That’s why investors have been shifting into utilities and the like and out of bonds for roughly the past year. The price of buying bonds kept going up, driving effective yields (interest) down, making bonds less desirable. Particularly when you could buy utilities, REITs and similar instruments that yielded a lot more, albeit less safely. And the underlying cause of this contrary action, this contrary shift to high-yielding stocks, was that destabilizing inverted yield curve.
When every right move is wrong
When that curve inverts, it tends to make normally placid bond holdings look like a trip to Superman’s Bizarro World, where everything is exactly the opposite of what you think it should be. Those bond fans who didn’t have the courage to migrate to high-yielding stocks in their never-ending quest for yield ended up bidding bonds higher and higher, bringing yields lower and lower.
But over just a few days, the opposite panic seems to be occurring. Now, everyone who bought overpriced bonds as a hedge against a recessionary Armageddon seems to be dumping them and heading for stocks. And nothing facilitates that better than a buying panic triggered by a poorly communicated diplomatic pronouncement that got “lost in translation.”
Thus, Thursday stocks in most sectors soared for much of the day. Especially those like Apple, whose continuing (and surprising) big returns would gain an immense additional boost if the US-China tariffs and associated trade war began to wind down.
What stocks got hit Thursday?
Meanwhile, most listed bonds along with interest-sensitive stocks like REITs and real estate issues took a hit. In the US, real estate-related businesses like REITs are likely to take a hit if borrowing costs suddenly get more expensive. What a racket this is.
Meanwhile, banks and financial institutions generally got a boost. As the guys who actually charge the higher interest rates we’re seeing, all of a sudden, it looks to investors like they’re going to make more money, rather than less. So buy, buy, buy!
Much to my chagrin, my portfolios, heavy with high interest rate preferred stocks, encountered “clobberin’ time” Thursday. We need a complete reversal of today’s mis-translated market thrill ride to put those issues back into the green-ink zone again.
Is it any wonder why dealing with Mr Market in 2019 often amounts to cruel and unusual punishment?
We await tomorrow’s (hopefully) clearer news on US-China tariffs to get markets straightened out again. Whatever that means, as 2019 slowly draws to a close that no one can predict.