The Sound of One Hand Clapping
The Sound of One Hand Clapping
The Sound of One Hand Clapping:
What the Financial Markets May Have Just Reminded Us – Yet Again – About Simple Physics
Where’s Bill Nye the Science Guy these days when we really need him?
Remember how he’s always breaking down some complex science phenomena with just a few household items? (And maybe the Baby Boomers among you will recall with me Don Herbert as Mr. Wizard…if your Way Back Machine has a setting for the early 60s!)
Either Bill Nye or Mr. Wizard could be of great assistance to us here in 2016 – to help us understand the little demonstration that the financial markets were conducting. Right from its opening day on January 4th, both the stock and bond markets moved lower, seemingly hitched to the still falling price of oil which, after peaking at $111.93 in mid-2014, had come all the way down below $30 by January 20th of this year!1 So the unusual simultaneous sell off of both stocks and bonds had to follow, or so the conventional thinking went, since those falling oil prices could mean only 1 thing: the world economy was slowing and a new recession could very well be on the way. Many of our clients opened their monthly statements in early February and frowned!
Enter Bill Nye and Mr. Wizard: didn’t some of those enlightened Renaissance scientists come up with a law something like “matter cannot be created or destroyed?” In the case of your January monthly statements, if the big, bold account total on the first page was noticeably smaller than it was on the December statement…where did the rest of it go?!
Think of it as one hand clapping: does that actually make a sound? Bill? Mr. Wizard? Your thoughts?
Back on February 10th, just as those statement envelopes were being opened, I wrote a note to clients entitled “Bonds, James Bonds” (see it at WealthCareFinancial.com) in which I noted the connection of stocks and bonds to oil and the potential for their recoveries should oil prices stabilize.
The very next day, February 11th, gave us the beginnings of the answer to our experiment: oil was just $27.89 that day…and the yield on the 10 year U.S. Treasury Note was a mere 1.63%2 - so here was our clue! That very puny interest rate on a long term loan of 10 years indicated that lots of dollars were hiding in cash (when bond prices get pushed higher their yield moves lower) and other places – like US Treasuries – which are very nearly like cash…and these dollars were being compensated quite poorly. Therefore, many of them were likely to be moved eventually back into other assets, including stocks and bonds, expected to yield more over time.
Sure enough: 30 days later, on March 11th, with oil some 36% higher at $39.343, 10-year Treasures had fallen by about 20%2, and dollars had moved back into both stocks and bonds…and, boy, did those bonds ever rally back (as was postulated in “Bonds, James Bonds”)! Higher yielding corporate bonds have moved up in price by 8.6% since February 11th and now have gained 3% year-to-date.4 High yield bonds in the energy sector have come back even stronger, up a more than eye-popping 25% since February 11th.
What’s next for oil and bonds?
We’re never in the prediction business, but we are in the perspective business and to that end our observation here is simply that, once again, the sound of one hand clapping doesn’t usually make much noise, lots of dollars going to cash and near cash positions yielding next-to-nothing don’t stay there very long. Oil – one commodity used the world over in large quantities every single day – isn’t going to zero in price any time soon; in fact, as with commodities generally, supply and demand work their way back to equilibrium in the sweet by and by.
Looking for some of those dollars to re-appear on your monthly statements? You didn’t likely see many of them in your February statement, since that turn – at least for now – in oil occurred about mid-month. But keep an eye on your mailbox for those March statements …and call us soon to get your 1st quarter review meeting on our calendar…after tax season, that is!
1 "Here Comes $20 Oil," Gene Epstein, Barron's, February 6, 2016
2 Daily Treasury Yield Curve Rates, US Department of the Treasury, February 11, 2016
3 DailyFX.com March 11, 2016
4 Bank of America Merrill Lynch High Yield Master II Index, March 18, 2016