The 10-Year Treasury Yield and a Year of P.E Compression ?

Always grateful when the thoughtful and measured Jeff Miller, the author of one of Seeking Alpha’s more popular weekly columns, “Weighing the Week Ahead” mentions this blog in the weekly market recap.

Jeff writes a very thorough piece – that weekly columns covers a lot of ground and is packed with useful economic and market information.

Thinking about the coming week on this Easter Sunday, I couldn’t help but wonder if the 10-year Treasury yield resumes its upward trek ? The 10-year Treasury looks like it is poised to rally (price, that is) with yields heading lower.

When this blog’s bond market forecast for 2018 was written in mid-December ’17, few caught the series of bullet points towards the bottom of the post noting how long had transpired since the TLT ETF had suffered a negative return – yes, it was 4 going on 5 years now since 2013 and the 12% drop in the TLT that year.

Simple statistics would tell us that 2018 could be a rough year for Treasury yields.

What worries me ? The fact that initial jobless claims are down to 215,000 – the lowest since 1983 per Brian Wesbury of First Trust. Westy is forecasting a below-average 150,000 “net new jobs” created in March ’18 thanks to East coast snowstorms and the fact that March non-farm payroll creation, per Wesbury – is usually below average.

The other data point that can’t be helped thinking about is that February ’19 payroll growth was over 300,000 and the average hourly earnings stayed flat. Despite signs of accelerating growth, the inflation indicators just haven’t moved, and that has put the bid in Treasuries again.

The Bloomberg Barclay’s AGG returned -1.47% in Q1 ’18, the TLT returned -3.50% and the TBF returned +3.8%. Clients inverse Treasury ETF (TBF) position is finally paying off. It’s a positive that expectations are low for this coming Friday, April 6th’s March jobs report. Checking the consensus, their non-farm payroll growth forecast is for 170,000 jobs, with economist consensus at 175.000 jobs.

What’s a Year of P.E Compression Mean ? 

SP 500 earnings growth in 2018 is expected around 20%. For the SP 500 P.E to “compress” it just means that the SP 500’s return in 2018 will be less than expected earnings growth. It’s been a few years since we’ve seen a year a “P.E compression” for the SP 500.

This Seeking Alpha article is a long-winded way of saying the same thing.

Conclusion: most bond asset classes had negative returns in Q1 ’18 and just two of the 11 SP 500 sectors had positive returns in Q1 ’18, Technology and Consumer Discretionarty. My guess is that we will see a more volatile year for equity markets and bond markets, and yet the SP 500 will finish the year with a positive return.

Readers / investors need to take a longer view of the stock and bond markets this year.

Because it is the first day of the 2nd quarter, here is a look at the 2018 SP 500 and bond market forecast from last December ’17.

Thanks for reading. Will do more blogging this week.



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