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In 1991 Billy and Akaisha Kaderli retired at the age of 38. Now, into their 4th decade of this financially independent lifestyle, they invite you to take advantage of their wisdom and experience.

Lance Roberts Market Report

Billy and Akaisha Kaderli

Market Review & Update

I previously stated that with the market already trading 2-standard deviations above the 50-dma, further upside could be limited. Such was the case as markets struggled all week to hold gains in a very narrow range. (Horizontal dashed lines.)

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

Currently, the money flow signals remain positive, but “sell signals” did trigger as of the close on Friday. While the money flow itself remains strongly positive, the “sell signals” continue to suggest downward pressure on prices currently. However, given the more extreme overbought and bullish conditions, there is a risk of a deeper correction over the next few weeks.

Importantly, as discussed last week, while we will certainly warn you of when our indicators turn lower, the problem remains two-fold:

  1. The indicators don’t distinguish between a 5% correction and a 20% drawdown; and,
  2. Secondly, the corrections often occur so quickly you don’t have much time to decide just how defensive you need to be. 

In other words, it is often advantageous to pare risk by “leaving the party a little early.”  

 

 

 

 

Are Rates About To Cause A Problem

The question we need to answer is why the market has been struggling as of late. As we touched on last week, investors may be starting to factor in the twin threats of higher inflation and interest rates. To wit:

“With an economy pushing $85 trillion in debt, the entire premise of the ‘consumption function,’ as well as ‘valuation justification’ for the stock market, is based on low-interest rates. However, that is rapidly ending as the rise in rates is now approaching a “danger zone” for the markets.”

As discussed in our #Macroview report yesterday, interest rates are rapidly approaching the 1.5% to 2.0% barrier, where higher payments will collide with disposable income. Historically, such has not ended well for markets.

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

The rise in interest rates is much more problematic than most suspect. Higher interest payments reduce capital expenditures, threatens refinancing, and spreads through the economy like a virus.

As noted by Laura Cooper yesterday:

“The writing may soon be on the wall for the buy-everything-but-bonds rally, with focus on inflation fears and subsequent Fed tightening. Yet it’s rising real yields that might prove to be the ultimate stumbling block for the risk rally.”

Little Margin For Error

Higher rates also quickly undermine one of the critical “bullish supports” of the last decade:

“In a heavily indebted economy, increases in rates are problematic for markets whose valuation premise relies on low rates.”

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

“Each time rates have ‘spiked’ in the past; it has generally preceded a mild to a severe market correction.

As is often stated, ‘a crisis happens slowly, then all at once.’

So, how did the Federal Reserve get themselves into this trap?

‘Slowly, and then all at once.’”

When combined with higher inflationary pressures due to stimulus injections, such becomes problematic. Higher borrowing costs and inflation compresses corporate profit margins and reduces real consumption as wages fail to increase commensurately.

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

While the Fed continues to suggest they will let “inflation run hot” for a while, the problem is that the real economy won’t. The impacts of higher payments and costs will derail consumptive spending very quickly, given the real economy is still massively dependent on “life support.”

Equally problematic is when the stock market suddenly realizes that higher rates have derailed a primary thesis of overpaying for value.

We are Retire Lifestyle Mentors. Our goal is to help you achieve your retirement dreams.

Risk Appetite Is Extreme

It seems as if with each passing week, we have continued to point out levels of exuberance either rarely or never, seen historically. This past week continues to see increasing levels of exuberance on many fronts.

One that I will discuss more in Monday’s blog is the fact that “no one is bearish.” Of course, that may be reason enough to be concerned.

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

As Bob Farrell once noted:

“When all experts agree, something else tends to happen.”

We must consider two issues.

 

 

 

 

The first is that current levels of speculation have increased the risk of a more extreme reversion. As physics’s fundamental laws suggest, a rubber-band stretched to its limit will experience a move of equal intensity in the opposite direction.

The second problem is the demise of the T.I.N.A. (There Is No Alternative) trade.

“The problem today is that the relationship between the 10 year US note yield and the S&P dividend yield has reversed. With risk-free rates of return rising, the 10 year US note now does provide an alternative – especially with the S&P dividend yield plummeting.” – Doug Kass

Markets Worry Rates 02-19-21, The Markets May Be Starting To Worry About Rates 02-19-21

When “risk” becomes realized, there is now a “safe” alternative.

The shift will likely not be subtle.

The views expressed by Lance Roberts and not necessarily those of RetireEarlyLifestyle.com

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About the Authors

 
Billy and Akaisha Kaderli are recognized retirement experts and internationally published authors on topics of finance, medical tourism and world travel. With the wealth of information they share on their award winning website RetireEarlyLifestyle.com, they have been helping people achieve their own retirement dreams since 1991. They wrote the popular books, The Adventurer’s Guide to Early Retirement and Your Retirement Dream IS Possible available on their website bookstore or on Amazon.com.

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