Does the negative relationship between stocks and interest rates always hold? As explained previously, the correlation between stocks and bonds (and therefore interest rates) fluctuates significantly. In the report by Deutsche Bank, strategist Francesco Curto examined the relationship between stocks and bonds in 1994. In 1994, the Fed had kept rates at 3 percent for three years in order to help the economy recover from the savings and loan crisis. Then the Fed unexpectedly raised the Fed funds rate by 25 basis points.
During the last week of May, the rate on the 10-year Treasury bond rose to 2.15 percent, the highest since April 2012. Since bonds are priced off of the Treasury spot rate curve (both in discounting the present value of the bonds’ future cash flows and in the spread relative to the spot rate curve ), it was not surprising that the value of the majority of bonds dropped at the same time. However, the stock market also gave back some of its double-digit gains for the year.
Since 2011, I have communicated to you my belief that stocks with high dividends and low standard deviations relative to the stock market represent a solid opportunity for income generation with historically less risk than other investment vehicles. Since then, volatility has continued to rise as uncertainty has flowed from all corners of the globe, leaving investors with few strong growth opportunities.
Over the past year, the prospects of budget cuts in the defense sector have risen in response to the growing national debt level. However, the exact amount of the cuts is uncertain. This uncertainty has weighed on stocks in the defense sector. Could this now be a time to buy these attractive stocks?
U.S. banks face a variety of problems: slow economic growth that weakens loan demand, low interest rates that pressure investment returns, tighter regulation that adds to increasing costs, and rising social and political movements against the sector. The industry faces significant headwinds in the near-to mid-term in this new reality. Despite these issues financial sector stocks have risen over 13 percent since the start of the year. Is this rally sustainable? Here are the main topics that investors need to consider.