Currently the market appears to have become “toppy”, as the major indexes are turning lower or are fighting to appreciate higher. Expectations are that for the rest of September and for some of, if not all, October volatility will become more prevalent. I believe there is a chance this may occur as the Fed continues to wind down of what is famously called Quantitative Easing 3 and the geopolitical risk continues to fester throughout the globe. In the past when the Federal Reserve wound down QE, the market became much more volatile and it wouldn’t be surprised if this was the case again.
Obviously there are many variables which could cause the market to rise or fall substantially. However, I believe interest rates will continue to decline over time and there is a chance that we will see 2% on the US 10-year bond before it again yields 3%. My rationale is based on the fact that:
- The growth rates in Europe, Russia, China and others are slowing down.
- there is also a flight to the dollar by foreign investors ; and
- interest rates of the German Bund / other issuers in Europe keep declining despite the fact that they are riskier than US Treasuries.
Over the longer term, we expect the massive structural cleansing to continue yet it might mean a sacrifice of global growth during that period of time. High quality equity positions should continue to receive a premium due to their ability to generate large amounts of free cash flow and control costs.
Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.