Yellen Speaks, Market Listens

Today, March 19, Janet Yellen said she would raise interest rates sometime in 2015. The market heard, and interest rates rose. Rates were described in the media as “leaping”, “surging”, “rising sharply”. This day is a dream come true for all those strategists who started 2014 with bullish sentiments towards stocks and bearish sentiments towards bonds. But let’s see what today’s ‘enormous’ increase in rates really means.

First, long bonds, due in thirty years, closed today at the same yield as at the end of January. This yield, 3.64%, is well below the high for the year at 3.95%. At the other extreme, the one year note is at the same old January yield too. But in between! Oh my! The ten year closed at a yield of 2.76%, which means its price was a whole 0.7% lower than the day before! Disaster! And the five year with a yield of 1.69% – same deal! Catastrophe!

On this same day, the S&P 500 sank 0.6%. Somehow, though this decline was pretty competitive with the bad news from bonds, the media wasn’t impressed. No one really mentioned stocks.

The words used to remark on today’s market activity – or not, as the case may be – tell us that the consensus weighs in favor of stocks here in 2014. People want to believe stocks are going to be great again, like in 2013. This isn’t unlike those of us who are Yankees fans, pining for Derek Jeter. It’s tough to admit he’s aging. The bull market is aging, too. It might not retire, but the home runs are over for now. And while we are not nearly as bearish as most of our peers towards bonds, returns there will be at best singles or doubles. All in all, this year is shaping up as less rewarding, but more risky, than 2013.