An Old Saying Rings True Yet Again

Top Of Mind...

There is an old saying among certain professional investors: "The news follows the price."

What it means is, by the time the news breaks to explain why a certain stock price or the overall market moved up or down it is already past tense. This is mostly the case with the broader stock market though than it is with individual stocks, as individual companies are prone to gyrate higher or lower immediately following the release of their quarterly earnings results. Most of the time the broader stock market will already be rising when good news arrives, or already falling when bad news hits.

Now it seems to be happening again within the bond market. Bond guru and former PIMCO-Founder Bill Gross said this week that we should expect a mild bear market for bonds. Specifically, he referred to U.S. Treasury bonds, which are traditionally the safest and most conservative of all bond classes.

The thing is though, Treasury bond values have already been falling for the past five months. Long-term interest rates have simultaneously risen because bond values and their interest rates move opposite one another (a frequently discussed concept that I won't detail here but am happy to explain).

I have written for the past two months that the Treasury bond market was on shaky legs. I derived that opinion from our own price analysis, which started months ago. The fact that a famed bond investor like Gross muttered the words "bear market" are not reasons to justify investment decisions you might make, despite the fact that his expertise carries weight when he speaks.

It is not that I necessarily agree or disagree with Gross' assessment. I have felt that the Treasury bond market has been in trouble for a while, but I refrain from using the words "bull market" or "bear market" in general because they have become such ambiguous terms.

Gross went on to say that he favors investment-grade corporate bonds, which are an asset class that look relatively appealing when compared to Treasuries but are still fledgling a bit as we speak. I am glad he mentioned that though because it helps reiterate that not all bonds are created equal -- a popular myth that needs to be expelled. Corporate bonds differ from Treasury bonds. Investment-grade bonds differ from high-yield bonds. Short-term bonds differ from longer-term bonds. So on and so forth.

For more proof that news follows price, look at 2002 or 2008. During the "dot-bomb" era the worst year of stock market returns was 2002. Yet, leading up to that year the market had already fallen some -25% between the summer of 2000 and the end of 2001. But it was not until unemployment picked up in late-2001 that the news stories started rolling in.

When Lehman Brothers declared bankruptcy in Sept. 2008 the U.S. stock market had already lost 20% in the 10 months preceding that event. Did the market worsen from there? It sure did, but stock prices were already on the decline for quite some time before that point.

These are just a couple stark instances that may help explain why our investment management approach focuses almost entirely on price movements, rather than product launches, press releases or someone else's research report. Supply and demand are the only aspects that matter when it comes to analyzing market movements and the purest reflection of supply and demand is price.

This may help explain why I am often ambivalent when asked what I think about a particular business when it makes news. It isn't that I am uninformed, it is just that the news does not matter much to me because by the time it comes it is in the past. Yesterday's news, if you will.

In The Market...

The S&P 500 gained +0.6% this past week. Let's look under the hood:

(price data via

It was a choppy few days that needed a big Friday to finish positive for the week (and did). Most sectors were higher while the defensive ones, namely Consumer Staples and Real Estate, were down.

Technology is easily the best-looking sector heading into next week, but for tech stocks to continue to lead they will need to surpass their previous price highs that many of them set in late-January. The same goes for the entire market as a whole via the S&P 500, but the S&P is still more than 4% away from its record high, whereas the Tech sector is within striking distance of its all-time high. Technology may hold the key for the broader market.

Bonds were negative again and have fallen in seven of the last 10 weeks dating back to December. The 10-year Treasury bond yield is knocking on the door of 3.00% but it has yet to rise that high. I think that is where interest rates will run into some resistance if history has anything to say about it. I could envision bonds rallying some point soon, even if it is temporary.

This chart of the 10-year Treasury yield (interest rate) shows why:

(created in

Notice in late-2013 that interest rates made a sharp U-turn when the yield reached right about 3.00%. This is certainly no guarantee that history will repeat itself, but if it does, bonds would benefit in the interim. I suspect that rates will pull back a bit if/when 3.00% is reached before ultimately rallying higher.

In Our Portfolios...

In Financial Planning...

Going through open enrollment at work?

If so, this is a reminder that we are happy to review your employee benefits options as it relates to deciding between health care plans and any flexible spending accounts your company offers. These choices are often complicated and confusing, especially Health Savings Accounts (HSAs). I would suspect that HSAs will slowly replace more traditional PPO options over time. If you want help understanding your HSA, let us know.

What's New With Us?

In light of the snowfall we had the past few days I will be trying to stay warm while finishing up my latest house project -- installing new flooring in our laundry room. Also, next week I will be out of the office most of Thursday and all day Friday, so the weekly blog may be delayed until the following Sunday or Monday.

Just so I don't forget, our new office address effective March 1st is:

801 2nd Ave Suite 800
Seattle, WA 98104

I will provide my new direct line phone number when officially moved.

Have a great weekend,

Brian E Betz, CFP®