Pop quiz: When did the Dow last drop as much as it did today?

Short answer: Who cares? You’re not selling today, so don’t fret. Longer answer: The last time was eight months ago, but let’s put things in context. The Dow dropped by more than 800 points today — an amount that definitely catches attention. But in the grand scheme of things, it’s just a blip on the radar. So, what happened today? Basically, interest rates. Treasury yields have surged lately, specifically the yield on the 10-year U.S. Treasury note. It spiked last month and has continued its rise into October. A rise in yields means higher borrowing costs for corporations and investors. It also makes stocks look less attractive compared to bonds (For the pros out there, higher yields also make stocks look more expensive because of a higher “discount rate.”) On top of that, richer rates of so-called risk-free bonds can attract investors away from equities, which are perceived as comparatively riskier. MARKET CONTEXT Over the past two years, U.S. markets have soared. The Dow Jones Industrial Average gained more than 7,800 points in 2016 and 2017, and has continued rising this year. Dramatic numbers reported during the volatility of the first days of February kicked off a rockier 2018 than

October 10, 2018 No Comments

Is it time for a reckoning in stocks?

Is it time for stocks to sell off? In light of the 10th anniversary of the collapse of Lehman Brothers last month, we should remember that it’s a mistake to be complacent about what could happen in markets. Extreme economic and financial events are far more likely to occur than we like to believe. But the real lesson of Lehman is not so much that very bad things can occur — it’s that anything might. Investors should be mindful of the risk of further crises, but they should also keep in mind the possibility that things might turn out just fine. This is hard to do. It’s far easier to think of ways that things might soon go wrong. The U.S. stock market is the most expensive stock market in the world currently, according to renowned Yale economist Robert Schiller. The economy has enjoyed a long expansion — maybe too long. The S&P 500 hit its market bottom in March 2009, and since those lows, it has rallied 334 percent in the longest stretch on record since World War II without dipping into a bear market. Perhaps the Federal Reserve will tip it into recession. The trouble in emerging markets

October 8, 2018 No Comments

Why sub-zero interest rates are good for Asian debt

The BOJ effect Why sub-zero interest rates are good for Asian debt Despite warnings that outflows following the 2013 “taper tantrum” would continue into this year, investor interest in emerging market (EM) debt — specifically Asian — has made a comeback. July’s asset inflows for EM debt funds, for example, stood at $13.3 billion globally, the highest monthly total for the category since Morningstar began collecting data. The asset class has benefited from several tailwinds since the start of the year, including a rebound in commodity prices and a restrained U.S. dollar. But central bank intervention, specifically negative interest rates in the developed world, stand out as the proximate cause for recent attention. Asian credit markets in particular have benefited from easy money. The Bank of Japan, which adopted negative rates in early 2016, has taken extreme measures in an effort to counter deflationary trends in the country, including yield curve management. The impact on Asia is most pronounced in Indonesian and Malaysian debt. Take, for instance, sukuk from the region. These Islamic bonds have enjoyed outsized attention thanks to BOJ intervention. In addition to the low levels of sukuk issuance, negative rates have created what experts describe as a

October 17, 2016 No Comments