Transcript:
Tom Vaughan:
Hello, everyone, welcome to Wednesday. The S&P 500 was up about a quarter of a percent today, and the big news was around the inflation number that was reported today. So, the inflation was a little bit lower than expected, and it was a little bit lower than previous months, which in this environment is a good thing.
So, let me share my screen here, and I can kind of try to describe how the market looks at inflation, and what’s good about it, and where some of the problems are as far as that goes. And so I’m going to share here is a chart of the 10 year Treasury yield. This is from Yahoo Finance: This is going back five years, and this shows at any point in time when you bought a 10 year US Treasury, what yield or interest rate you might expect to get from that, and you can see it was going up here all the way through until about the middle of 2019. And in that particular environment, what that means is that the bond market thinks that the economy is going to be improving, right? And that’s a good thing. And we saw some pretty good stock markets in this timeframe. And then we saw the yield start to come down. They started to lower interest rates, just dealing with some of the issues that were happening. There was a china trade war going on that we had some problems in terms of economic, and so that was coming down again; 2019 turned out to be a really good year for the stock market.
Look at 2020, you can see that the yield fell dramatically. Again, Federal Reserve reduced rates all the way down to basically zero, trying to stimulate the economy. And down here in August of last year, basically a year ago, we hit the lowest point for an existence for US Treasury, a 10 year Treasury, at a half a percent. So but if you look, now, we’ve kind of had this trend, I tried a little trendline in here. And so again, probably pretty likely, we’re gonna get back to hear at some point in time and around 3% on a 10 year Treasury: That’s a pretty healthy number, nothing wrong with that. This was a half percent, which is really pretty incredibly low.
The trend is important. If you look here, that red line, if we continue to go along that trend at that pace, that’s going to work out pretty well. What you don’t want is to see the interest rates go too fast on the upside, and that’s exactly what happened here. And so we had this giant jump here. And this correlated to the vaccine coming out and being distributed at a very high rate. The case count in the virus at that time was dropping quite rapidly, and they put out that $1.9 trillion COVID relief package all at the same time, and the market really thought, “okay, we’re gonna end up in a high inflationary environment.”
It missed a whole bunch of things that were happening in the end: People work coming out of the house, to come back to work. We got all these open jobs, that slowed down the growth the economy a little bit, and then the supply chain issues that were happening, were kind of slowing down the economy a little bit. We ended up with it coming back down, and you can see right here, that it’s kind of bumping back up again. I think it’s probably going to reestablish this trend, and that’s because of the job numbers that came out on Friday, which were pretty good: 934,000 new jobs. And so there’s some more hope for economic growth as far as that goes.
And so that’s basically what you see here is that the bond market got kind of ahead of itself, thinking that the economy is going to grow faster, and that it really did. None of us have been through a pandemic before, so trying to figure out how this reopening is going to work is going to be really interesting. And then it’s kind of come back down more or less to this trend, and I think that trend will reestablish.
Again, when you look at the overall stock and bond market, and really kind of factor in the economy, you want to take a look at that 10 year Treasury rate and see where things are going: When it’s going up, especially in a nice even pace, which it essentially is now, then things are really good. That means the bond market thinks the economy’s going up, and that will benefit the stock market. When it goes up too fast, that can be somewhat problematic. And so we might get back to a point where things get too fast, but right now, we’re kind of at this balance point when we have the different pieces that are slowing the economy down, and the other pieces that our pushing economy forward. Infrastructure bill, and some of the different government spending is pushing it forward, consumers are coming back out and starting to spend that’s pushing forward. And then the Delta Variant and the people aren’t coming out of the home as fast as needed, to fill some of these jobs; that’s kind of slowing things down: Supply chain issues.
So right now, actually, the teeter totter is really, really good. It’s putting us right in the right spot. Eventually, there’s people probably do come out of the home and get back and take some of these jobs. And maybe the virus eventually starts to… who knows how long that’s going to take, but eventually starts to to reduce its impact on the economy. We probably will see a lot more economic growth there. And we’ll have to see if it heats up or not. So that’s going to be the issue.
I think that’s a ways away I’ve been saying for a while that I thought these other issues would happen, and that would slow things down enough to keep inflation in check. I still think 6 to 12 months from now, we’re still talking about similar situations, and maybe not a hyper inflationary environment, but we’ll have to wait and see what happens after that. All of this relates to what the Federal Reserve will do to try to fight this potential inflation. So right now, they’re not worried about it: They’re seeing it as transitionary, and actually, they seem to have been right. Again, I think right now, if you listen to Federal Reserve, you’re going to get some good information, in terms of where things might be going. So anyway, that’s what’s happening today. always an interesting timeframe, of course, and look forward to talking to you tomorrow. Thank you very much.