U.S. equities continued their ascent yesterday as the Dow, Nasdaq, and S&P 500 registered gains of 2.1 percent, 2.8 percent, and 2.3 percent respectively. With the rally, both the Nasdaq and S&P 500 are now positive for the year and the S&P 500 closed above its technically important 200-day moving average. The market had been trading on a technical basis for some time and this critical close above 1110 on the S&P 500 (closed yesterday at 1115.23) could propel the market higher in coming days and weeks. I highlighted in this piece on June 7th that the 1040 level on the S&P 500 represented a key support level to the downside. The fact that it held above that level and rallied sharply above the key resistance level in short order is also another bullish sign for the markets. Solid economic data the rest of the week could provide the catalyst for the next move higher. However, keep an eye on the 1060 level on the S&P 500 which could signify the second shoulder in a “head and shoulder” pattern, often a sign of bearishness. While this can be confusing, recall that psychology and technical’s can drive the market in the short-term, while fundamentals will ultimately drive valuations in the long-term.
On the treasury front, yields backed up across the curve the past few days as investors get more comfortable with risk. However, the yield on the 1 month T-Bill is approaching zero percent on quarter-end window dressing, excess liquidity built up in the system, and a U.S. regulation requiring investors to purchase more liquid assets (Bloomberg Story Attached). Also of interest, pun intended, in regards to the outlook for rates was the research piece issued by the Federal Reserve Bank of San Francisco on Monday suggesting that the Fed would not begin to raise rates until 2012 (CNBC article attached). While the research does not represent the official stance of the Federal Open Market Committee (FOMC), it perhaps highlights the view of some within the Fed’s walls as to the future outlook for rates. While 2012 might seem far off, it certainly jives with my expectation for rates to stay lower for longer than most believe.
On the fixed income front, it is getting more and more difficult to identify attractive opportunities as yield continue to decline. Mortgage backed security prices remain at or very near all time highs making it harder to add collateral. However, we still have clients selling inferior mbs structures (i.e. hybrid arms, smaller pools, etc.) at gains, while reinvesting into cleaner, more predictable cash flowing mbs structures. Depending on whether or not one agrees with the Fed’s research piece or our outlook for rates, one might consider utilizing a barbell approach to investing by adding longer duration tax-exempts and taxable munis to generate higher yields. This strategy has worked extremely well over the past year or so. Certain new issue deals continue to be mispriced and provide nice yield and total return opportunities. Lastly, selectively adding corporates 5 years and shorter can provide solid yields on the short-end of the curve.