The Arbor Outlook: Bond Markets, Rainbow Trout and Jerry McGuire

“Show me the money!”
— from Cuba Gooding Jr. and Tom Cruise in "Jerry McGuire"

Imagine at your last restaurant meal that the rainbow trout was delicious, but the garlic potatoes were tasteless and cold. How would you characterize the quality of your dining experience?

Bit of a mixed bag, right? Welcome to modern markets.

At this writing, the S&P 500 is just shy of breaking the 2,400 mark for the first time in history. When the S&P 500 is up, it generally means that investor enthusiasm about equity ownership in large American companies is high. If the future looks bright, you’d likely want to capture as much of that upside as possible. And stocks are typically the best vehicle for doing that.

Interestingly, the bond market, which in the United States is roughly twice the size of the stock market, is treading water. When long term bond yields on a 30-year US Treasury go up, this typically reflects an expectation that interest rates and/ or inflation will likely be higher in the future. If one or both of those factors occur, your real return suffers.

Late last summer, long term interest rates bottomed at just over 2 percent on the 30 year Treasury. Currently we’re over a 3 percent yield and most of that jump took place a few months ago. But after that brief surge, rates basically haven’t budged, while stocks have continued to climb.

So while stocks have increased on positive expectations for American businesses, the bond market seems to be taking a wait and see approach. In movie terms, it’s pulling a “Jerry McGuire,” asking the economy to “Show me the money!” (Or rather, “Show me the inflation!”)

Commodity markets also do not always reflect the same level of growth and confidence as do equity markets. If copper prices are through the roof, there is an expectation of global growth and new construction. After rising as much as 11 percent since November, copper prices recently dropped by almost 4 percent since mid-February. The price of copper is often viewed as a reliable reflection of growth, so confidence in short term construction activity is waning somewhat.

The demand for energy is another referendum on the economy. The U.S. Energy Information Administration reports that retail U.S. regular gasoline prices are expected to rise to $2.33 in March, to average $2.39 for the year, and to average $2.44 for 2018. These modest price increases, while allowing consumers to continue to spend in other areas, don’t signal much of an increased energy demand.

Many people follow the movement of the Dow Jones Industrial Average. But other markets can give also give us clues as to what the overall investment world thinks. And as we know, there’s more to this meal than the entrée.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.