One Big Reason the Bull Market Should Continue
More good news for the 'Melt Up'... 'This is not the end for stocks'... One big reason the bull market should continue... Still looking for the perfect Father's Day gift?...
On Wednesday, we shared our colleague Steve Sjuggerud's latest thoughts on the 'Melt Up'...
In short, the re-escalation of the trade war has caused many folks to become worried again. By some measures, investors have become as cautious about the market as they were during the worst of this past December's decline.
However, despite these concerns, Steve notes U.S. stocks have actually held up relatively well. The broad market fell for most of the month of May. Yet, as of today, U.S. stocks are just a little more than 5% below their all-time highs.
To Steve, this combination means stocks are likely headed much higher from here...
But this isn't the only reason he's convinced the Melt Up isn't over yet. As he explained in the latest issue of True Wealth Systems, published yesterday...
This is not the end for stocks. This is not the end for this bull market.
I believe this isn't the big one for one key reason. It's the most important tool I've been using to keep up with this bull market. And it's been a positive surprise in recent months.
Instead of telling us to fear the worst, it says that this is just a bump in the road to higher highs...
Steve was referring to the U.S. Treasury yield curve...
As regular Digest readers know, whenever the yield curve has "inverted" – that is, when short-term interest rates have risen above long-term rates – bear markets and recessions have typically followed anywhere from six to 24 months later.
Earlier this spring, we mentioned that some parts of the yield curve had started to invert. Most notably, three-month Treasury yields had risen above 10-year yields.
Steve was watching these moves closely, too. But he wasn't ready to panic just yet.
Like us, he noted that the most widely followed measure of the yield curve – the difference between two-year and 10-year Treasury rates – had not yet inverted. Here's what he wrote to True Wealth Systems subscribers back in April...
Last week, the three-month Treasury yield rose above the 10-year Treasury yield for the first new signal since 2006. This is why the media has been shouting about the inverted yield curve.
Now, to be clear, the yield curve we've been tracking is the difference between 10-year bonds and two-year bonds (or the "10-2 spread"). This curve has just as strong a track record of calling recessions and market tops, but it's less influenced by the Federal Reserve.
That's because two-year bonds are more market-driven than three-month Treasury bonds. The Fed has a bit less control. And we prefer this measure for that reason.
Importantly, the 10-2 spread has not inverted yet. You can see this on the chart below – the line hasn't yet crossed below zero. But the spread has gotten narrower. Take a look...
Still, Steve admitted that the "clock" was likely ticking on this long bull market. More from the April issue...
We're not at a recession or a market crash yet. But we're getting closer by the day. And we've got to be prepared for what happens after the yield curve we're tracking does invert...
The reality is that these two measures aren't that different. And if the spread between 10-year and three-month yields has inverted, our 10-2 spread will likely follow soon. That's what history says we should expect.
Steve said he was prepared to see this happen 'any day'...
But that hasn't happened. In fact, as Steve explained yesterday, this spread has actually been widening again...
Why am I so confident this isn't the Melt Down? It's something that has actually been surprising to me. I wouldn't have expected to be writing this two months ago... The chart below shows it...
The spread between 10-year and two-year yields has been falling for years. But it hasn't gone negative. It hasn't yet inverted. This gives me incredible confidence today.
To Steve, the 'bottom line' is simple...
Until this chart dips below zero, the bull market is likely to continue. More from this month's issue...
History tells us that an inverted yield curve (the one from the chart above) always happens before recessions and major market falls. Not only that, it usually happens months – even a year or more – before the ultimate peak.
It hasn't happened yet. That suggests we have more upside ahead...
Sure, there will be volatility. But that's standard, too. Corrections are the norm during a Melt Up. Understanding that will prevent us from turning a minor pullback into a major worry.
One last thing before we sign off today...
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New 52-week highs (as of 6/6/19): Axis Capital (AXS), CME Group (CME), Essex Property Trust (ESS), Franco-Nevada (FNV), Hershey (HSY), Invesco Value Municipal Income Trust (IIM), Ingersoll Rand (IR), Kirkland Lake Gold (KL), Kinder Morgan (KMI), Coca-Cola (KO), iShares iBoxx Investment Grade Corporate Bond Fund (LQD), McDonald's (MCD), MarketAxess (MKTX), Motorola Solutions (MSI), NVR (NVR), PepsiCo (PEP), Starbucks (SBUX), Vanguard Real Estate Fund (VNQ), W.R. Berkley (WRB), and Aqua America (WTR).
Several readers weighed in on yesterday's Digest on cyberattacks. Send your notes to feedback@stansberryresearch.com. As always, we can't provide individual investment advice, but we read every e-mail.
"Cyber attacks as described, just as attacks on Banks and Credit card companies and large and small businesses will only be stopped by Cryptographic transactions which rely on multiple authentications and not only one single one. This is why these systems and much of the web is fraught with security issues. Clearly, digital currencies themselves are not of great value. What will be the most value is when all communications and financial transactions can be run over these systems making them extremely difficult to attack. Only then will transfer of information and monetary transactions be safe over an internet which was originally designed only for the free flow of information. Large companies like Microsoft are building a platform to use Ethereum and IBM has created an international currency transaction system using Stellar Lumens. Already, large trading platforms are working on or considering a transition to cryptographic transactions. The landscape will change greatly in this arena as the methods change and utility improves. Until a time when all internet systems are secured, we can only hope that individuals don't inadvertently allow access to large databases." – Paid-up subscriber Jack G.
"Hello, Microsoft Word (never use cloud version) allows you to create a document with all your personal information contained within and then encrypt that document and save it locally. It's 256K encryption. Then all your passwords can be kept locally, and unless the PC is stolen thieves cannot hack the cloud and get to it. Even if stolen pc, they would still need the password to the document, which is again encrypted at 256K bit. You keep the password in your head, and it's a complex one, only you and she might know. Simple.
"Plus, many people have husbands, wives, and others who need access to that information, if it is in the cloud, and they don't give the other person access to it, it could be months for financial information to be straightened out. Keeping the document local, and letting the other person know its password, then allows your better half gain that access and fix those things if you should die, or the reverse they should die.
"Routinely I update my document, print it out and put it in a secure location which my GF knows about, so if I die, she can gain access to beneficiary information, accounts, credit cards and other places I have accounts, which need to be closed, etc..." – Paid-up subscriber Monty B.
"I think all these cyber-attacks are coming from our corrupt government there homeland security and NSA they are more afraid of their own citizens turning against them due to all the forced laws they impose on the free American citizens that why they are looking into everyone's computer and phone." – Paid-up subscriber Cliff B.
Regards,
Justin Brill
Baltimore, Maryland
June 7, 2019