This may be a difficult question for many people to answer because interest rates have generally been on a downward trend for a long time. Rates hit a major peak back in 1981 of about 16%. The chart below shows the 10-year yield during the past 55 year period. ‘Loose’ US official interest rate policy has played a big role in keeping rates low in recent years. But with economic growth strong, consumers and businesses confident, and wages moving up, Federal Reserve policies are changing and becoming ‘tighter’. Yields on 10-Year Treasuries seem likely to move above 3% soon.
We’ve read a lot of expert commentary and studied a lot of charts over the course of the past week in an effort to gain insight into the recent equity market price movement. The chart below is the picture that is worth a thousand words. Extreme volatility (or ‘vol’) seems to be contained to the stock market. Equity market vol as represented by the Chicago Board Options Exchange Volatility Index, or VIX, was tremendous last week. Not so for vol in other asset classes like Treasuries, gold, and currencies.
Returns and valuation from holding equities have had a tremendous run-up in 2017 and over the last couple days the markets have given some of it back. The trigger to explain the last few days most commonly points back to an increase in wages. Wage Growth is a component of the monthly jobs reports published on the first Friday of every month. Wage growth could contribute to inflation picking up and from their, the conversation leads to Federal Reserve Bank policy, global central bank unwinds of easing, new risk premiums regimes and eventually a slowing economy.