“A nation that does not honor its heroes will not long endure.”
-Abraham Lincoln
Here’s what you need to know this week:
· Stocks give up gains and end the week flat
· Bond markets flash a warning sign to investors
New Team Member
I’d like to begin this week’s newsletter by introducing our newest team member here at Eternal Wealth Management! Meet Hannah Hartman: Hannah is currently working as our executive assistant while she studies for her advisor’s licenses and CFP® designation. Hannah is a graduate of Oklahoma Christian where she was the President of both Student Investment Fund and Gamma Rho. If you see Hannah in our office be sure to say hello! | |
Round Trip
Stocks fell sharply on Friday and erased essentially all of last week’s gains, undoing what had been a pretty strong week through Thursday afternoon. The S&P 500 gained 1.5% and closed Thursday at an all-time high of 7,502; however, Friday saw a surge of investor anxiety on the heels of President Trump’s trip to China. President Trump and Chinese President Xi Jinping both emphasized the importance of reopening the Strait of Hormuz but stopped short of agreeing to a joint effort to reach an accord with Iran[1].
Trump and Xi did announce a few minor trade deals such as China purchasing US oil and 200 airplanes from Boeing. Xi made a point of emphasizing China’s stance that Taiwan is part of China, raising concerns of escalating conflict surrounding the island that has become pivotal in the development of artificial intelligence. Trump invited Xi to continue their negotiations at the White House on September 24th[2].
Warning Signs
Stocks have posted impressive gains since the end of March, seemingly unfazed by the Iran war driving oil prices (and broader inflation) higher. The bond market has been less sanguine, and yields have moved noticeably higher since the Strait of Hormuz first closed. Why does this matter?
When the Federal Reserve wants to curb inflation, they raise interest rates to tighten financial conditions (fewer mortgages, less credit card spending, etc.). When interest rates rise, it devalues older bonds with lower interest rates. This makes sense if you think about it: why would you buy a bond paying you 4.5% interest when you can buy a bond paying you 5% interest for the same price? Investors who hold the 4.5% bond will have to sell it at a discount in order to make up for the lower coupon, and the discounted price will bring the buyer’s effective rate up to the current market rate (5%).
Still with me? Now naturally, no one wants to sell their investments at a discount, so bond traders will sell their bonds before interest rates rise so they’re not left holding the bag on lower-paying bonds if rates rise. As they sell their bonds, they’ll shave a cent or two off to get out of their bonds quickly, and as more traders sell, the discount gets deeper and deeper, driving those effective yields higher. Look at this chart of US Treasury bonds over the last year:
Yields had been drifting lower in anticipation of interest rate cuts this year, but you can see the dramatic reversal begin as soon as the Strait of Hormuz closed. The yield on 30-year US Treasury bonds currently sits at 5.19%, the highest since 2007. This means bond investors believe interest rates are going higher; in fact, the bond market is now pricing in a 61% chance of an interest rate hike, and rate cuts appear to be completely off the table[3]. Rising interest rates are typically seen as a threat to bull markets in stocks. There’s still time for conditions to improve before the Fed has to take action, but policy makers should take heed of this warning sign before things get worse.
Upcoming Art Gallery
Quick reminder: our art gallery for clients and friends is quickly approaching on June 11th from 5:30-7:00 PM. The art gallery will be set up in our office building’s lobby and will feature four artists as well as complimentary food and wine. Each week we will feature one artist in the upcoming show; this week’s Featured Artist is Greg Erway. Greg is a contemporary Western artist whose work reflects a deep connection to the Great Plains, capturing the people, animals, and enduring spirit of the American West. His paintings, known for their bold color and layered technique, balance a contemporary perspective with a timeless sense of place. Make sure to put our art gallery on your calendar! | |
What Else
· The Senate officially voted to confirm Kevin Warsh as the new Chairman of the Federal Reserve
· President Trump said that US & Nigerian forces killed a top ISIS leader in southern Nigeria
· An Israeli airstrike killed Hamas’s top leader in Gaza
· Russia and Ukraine have continued to trade drone strikes despite the official ceasefire
· The OKC Thunder play Game 2 of the Western Conference Finals against the San Antonio Spurs tonight at 7:30 on NBC
What We’re Reading
Do you have anything you like so much that you want to be buried with it? Archaeologists in Egypt discovered a 2,000 year old mummy buried with a papyrus of the Iliad, Homer’s ancient epic. This is the oldest known discovery of an individual being buried with a written work of fiction and shows that epic stories have captured the imaginations of humans for millennia. Click below to learn more about this discovery and see photos of the dig site and the papyrus itself:
What’s Happening Downtown
Fourth Fridays returns to the West Village this Friday, May 22nd. This event features deals from restaurants and stores all across the West Village district, multiple live music stages, a market of local vendors and family-friendly activities such as face painting and a bouncy castle. Click below for a full list of deals and activities:
To read more from our blog, click here
Written by: Kane Ogle, CFP®
Steve Beck, Kane Ogle, CFP®, Amber Eduvigen, CFP®, Cale Olbert, CFP®, Brett Valentine, CFP®, Brandon Ingerson, Bill Daniel, Sam Postich, Jenni Hess, Hannah Hartman