220421 Geeking Out Over Indicators - YouTube

Hey there Mick Graham Raymond James. Today is the  21st of April. So I hope everyone got through tax  

season. So this week's article which I thought I'd  just explain a couple of graphs, above and beyond  

what I've written about... is about indicators.  This one was driven mainly by a lot of news  

you know that I read, comes on the TV business  news about recessions and indicators that show  

you recessions and which was sort of the big story  is that the difference between the 10-year yield  

and the two-year yield on the U.S. government  bonds is basically hardly anything and that has  

given you some indications in the past  that a recession is looming. However  

if you've followed my readings or writings  for any period of time you'll realize that  

I follow the conference board's leading economic  index. The LEI comes--it's published monthly.  

It's a combination of about 10 different economic  data points that are ranked and then put together  

and you can probably see if I go if--if I look  at a longer chart here that actually sort of  

shows you the same way. I see the blue line here  tips over and then you know a recession starts,  

this is what this is actually showing you--is it  gives you a good 6 to 9 months indication that  

a recession is coming so with that type of data  I'm this is obviously my favorite chart to look  

at where we are in an economic run so going  into 2020, into COVID, you know it started  

to tip over a little bit obviously no one could  have known that that was going to happen but uh  

um you know the chart was right again or the index  was right again so but as we've bounced back um  

we continue to have another positive month for the  month of march it increased by 0.3% and as long as  

we continue to rise then you know the economy's  still moving along. Plenty of risks out there,  

you know with the Fed, and how quickly they'll  raise and that type of stuff but you know as far  

as the economic standpoint goes for for right now  we're economically standing on a pretty good foot.  

The big thing that we or the big news that  you may or may not know is the move in the  

10-year treasury rate this is how much yield the  government are paying when they loan out 10-year  

bonds all right so if they issued some new ones  today this would be what they have to pay out  

where if they issued them you know in during the  COVID period which they did a heck of a lot of  

um you know it was below 80 basis points or point  eight of one percent so in the last couple of  

weeks you've seen rates just skyrocket and that  has a you know an effect in a few different areas,  

which I sort of touch base on in the note. You  know as rates rise the price of your bonds come  

down no one wants your two percent bond for  a hundred dollars if they can get a three  

percent bond for a hundred dollars and that's  sort of what's happening here right now so  

um the bond market itself um has caught up it on  the chin since the start of the year the purple  

line here is what's called the Barclays U.S.  aggregate index--it's down you know, nearly 9% for  

the year. And while you've got the S&P 500 in the  U.S. Large Cap Index, you know was down around 12,  

coming to early March has sort of rallied back and  it's somewhere around about down around 6% right  

now, so it's actually doing better than the bond  market and and that's an issue because you know  

people consider the bond market as you know the  safe haven or the safer part of the index but it's  

got some price volatility, especially if you're in  mutual funds bond mutual funds. I mean they don't  

truly have an expiration so the bonds inside them  are managed per the parameters of the bond whether  

it's a long bond index a short bond index or um  intermediate bond index so if you own individuals  

like I do a lot of, then you know you just hold  it in maturity you know what to return you're  

gonna make as long as there's no default from the  company. So that's why they're classified as safe  

because stock prices go up and down but the bond  as long as the company solvent will pay their  

debt obligations so that's an issue. Furthermore  as interest rates rise, I go into this a little  

bit in the note today on the what's called the  equity risk premium now basically think about um  

the the expected return you're going to make  on equities a riskier asset over um inflation  

okay or over sorry the risk-free rate which is  considered like a U.S. treasury is is considered  

risk-free so the way they do these calculations  is you look at inflation and you look at that  

that yield for whatever period of time you can  do a mathematical formula and it comes out with  

as you can sort of see right here in  this calculation we've looked at a 3-year  

return on equities a three year period  when the equity risk premium comes down to  

this 1.5 to 2 area right now we're at 1.89 this  shows you that the return the average return  

for the next three years is annualized to measly  3.8% when it's much bigger. Obviously the equity  

markets have returned much more and not only  do you not get much of a return you get some  

pretty big negative years as that equity risk  premium comes down as the rates continue to rise  

and inflation's high or when inflation has come  sort of you know in that sort of area when you get  

that 4.7 for aps yield then this is you know the  range of returns can you know the negative side of  

it can sort of pop its head up a little bit more  so you know as you can see over when we've been in  

this period of time the range of returns have been  positive 15 to negative 9.2 so with an average of  

3.8 so sort of goes along the lines of what we've  been saying for a while is that you know we had a  

pretty good run the last three years in the equity  markets even given the 30 downturn from COVID,  

and moving forward we're not going to get those  type of returns again so this is probably one of  

the best indicators I've seen to be able to show  you that you know it's going to be tough to squeak  

out good returns now the reason we don't just  get out and sit on the sidelines because it's  

just a guess just like everybody else has got so  um so but you know we've got longer term sort of  

thought patterns than this and we know that over  the long run we we're going to be predictable  

in our returns. You know especially in the equity  markets um the bond markets will probably as rates  

still rise continue to sort of you know give us an  area of concern but you know we'll manage that by  

um you know buying shorter-term maturities  and and individual bonds so that's it for  

this week. Buy sells here I'm just about to add  2023 on there so we'll take a year off and we'll  

get rid of that COVID year, we'll come back to  some more normalized stuff. I'll give you some  

earnings forecast for 23 which is I think is  actually setting up for pretty good years.  

I've written to you before so but any questions  or concerns you can give us a call as always.