For Week of 7/11/2016

US 10 year Bond Prices to Remain Resilient,

US Stock Prices to Remain Moderately Resilient

These comments are based on a four to six week horizon.

US 10-year bond prices are resilient and can be expected to remain high for the time being. On a Market Resilience Index scale of 0 to 3, with 3 being the most resilient, US 10-year bonds are rated “3.”

Similarly, yields on the US 10 year bonds are “0” on the MRI scale. We can expect yields to stay low and even decline over the next few weeks. While the current yields are very low, they can go lower, as yields have done elsewhere in the world. Portfolios should be prepared for this possibility.

US large company stocks, such as those in the Dow Jones Industrial Average and the S&P500 are moderately resilient, at a “2” on the MRI scale. These may develop a higher resilience rating over the next few weeks. Stock prices will get battered with news of the day, including all the repercussions of the Brexit vote. I do not make an effort to forecast these events or their outcomes.  I just forecast the market’s ability to tolerate bad news. For now, it is moderately high and is likely to improve over the next few weeks.

The commodity market, as measured by the SPGSCI, is also moderately resilient, with a “2” on the MRI scale. I do expect commodities prices to soften over the next few weeks. However, those declines appear right now to be temporary and likely to be followed by higher prices in 6 to 9 weeks.

Other stock markets are not in the same condition as the US stock market. The European stock market is a “0” on the 0 to 3 MRI scale. The Japanese stock market is a “0” as well. The UK stock market is more resilient and is benefiting, at least for now, from the weaker UK currency.

Markets that go up in times of stress are showing high resilience. Gold is a “3” on the MRI scale. The Japanese Yen, which typically goes up in times of stress, is also a “3” on the MRI scale. There is an index called “VIX” and it is a “2” on the resilience scale. These are stressful readings. However, I do see emerging signs of stress reduction behind some of the ratings.

A Plausible Narrative

A plausible narrative that makes sense of the broad set of MRI ratings across asset classes goes like this...

The global economy is struggling, there is confusion over Brexit, and political uncertainly in the US and other major markets. The best quick-fix remedy for all our ills is a mix of low interest rates and a calming voice from the Federal Reserve’s Janet Yellen. The US Fed has the strongest medicine globally, and it is needed. However, the US is in the least need of the medicine. Therefore, we in the US will benefit from the strong medicine being administered globally, and benefit more than we alone need. For the time being, this will result in greater resilience for US stocks and bonds.

Please note:

  • The disciplined analysis of market resilience drives this narrative
  • Other narratives may be equally plausible
  • When the bottom-up resilience data suggests a change in the narrative, that change will be made and made quickly
  • The narrative does not affect the analysis of market resilience  

Focused 15 Investing model portfolios will be positioned according to the MRI ratings – overweight the resilient, underweight the vulnerable.

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