by K. Matras .........
Profit Taking Pulls Market Off Its Highs
The markets pulled back from their all-time highs yesterday as profit taking set in.
The narrative was that interest rates are on the rise and that set in motion yesterday's selling.
While some of that may be true (rates are expected to go up this year with the Fed predicting two or three rate hikes in 2018), none of this is new news, and is not expected to have any negative impact on the stock market.
For one, the yield on the 10-year Treasury is at 2.70%. But the earnings yield of the S&P is at 5.11%. Assets compete for investor dollars. The risk-based S&P yield needs to trade above the essentially risk-free treasury to make stocks the more attractive investment. With more than a 240 basis point spread in favor of stocks, the narrative of the 10-year ticking up today weighing on stocks is nothing more than a convenient talking point to explain the pullback - which in reality is nothing more than profit taking.
Theory is, when the 10-year yield is greater than the earnings yield, a bear market could ensue. But with rates expected to edge up gradually this year, while earnings estimates are surging, this narrative is terribly misplaced.
Personally, we did not get any volatility the last time Congress tried to pass a spending bill, in spite of the short-lived shutdown. But this time, it looks like both parties are getting farther apart on a spending bill given the debate over DACA and border security. Feb. 8th is the supposed deadline for the spending bill (but they did kick the can down the road three times already). And DACA doesn't 'need' to get resolved until March 5th. Nonetheless, the market could be sensing a true stalemate which makes it a fine time to pull some profits off the table.
But make no mistake, any short-term volatility or pullback is not going to derail this market. There is a new era of prosperity upon us with the tax cuts. Businesses have never been this optimistic. And it's all backed with real gains in sales, earnings and a bullish underlying economy.
So take the 'interest rates weighing on stocks' narrative with a grain of salt. It was just simple profit taking.
But get prepared to buy some of your favorite stocks on sale pretty soon.
This historic bull market is far from over. And this pullback may eventually be one of the best opportunities to add to your position.
Best,
