INDEPENDENT INSIGHTS Market insights from an independent perspective


September 18, 2019

Kevin Karpuk CFA

“There should be no such thing as boring mathematics.” - Edsger Dijkstra
Just as we were going to print about how well the bond market has reacted to the apparent easing of the trade war between the U.S. and China, the overnight cash market went zany. Before we comment on that, let us recap what we thought was a positive event over the past couple of weeks. Our clients and long-time readers of Independent Insights know that we like to take our macroeconomic signals from the bond market. Fixed income is mathematical. It is more calculating than its hotblooded cousin, equities. Stocks can dislodge from economic reality based on the emotions of traders. Bonds, on the other hand, have maturities. Your principal and interest is repaid (or not, in the case of defaults) at a known rate. Bonds do not feel the rush of an earnings report; they focus on the blander balance sheet. Stock traders are the life of the party; bond managers the designated drivers – a comment we mean as a great compliment. 
Over the past several months, stocks and bonds have been giving us two different signals. Stocks have been choppy but resilient in the face of trade concerns. Yields, on the other hand, fell precipitously. The bond market was signaling slowing growth and perhaps even a recession. One of the unknowns was whether the bond market was waiving a red flag of warning or throwing in the proverbial towel on the current economic expansion. 

The chart above indicates to us that the bond market is not yet ready to call an end to the current decade of economic growth. The quick rebound in rates associated with the mere expectation of trade talks should be taken as a strong positive by investors. The blip at the end of the time period was the response of the bond market to the attacks on the Saudi Aramco oil refinery. This reaction is both rational and expected when geopolitical risk increases. As of now, economic indicators generally seem to be indicating sustained growth. 
The “zaniness” in the overnight cash market is that the rates for secured overnight borrowing (backed by Treasury bills) have been skyrocketing. The early analysis is that this is not an indicator of financial stress like we saw in 2008. It is more a market imbalance occurring from the combination of corporate tax payments (a drag on cash in the bank) and a huge issuance of new government debt (remember, we are funding a trillion-dollar deficit). Bank balance sheets are strong, but they do not have a lot of excess liquidity on hand, causing these rates to jump because dollars are scarce. The Federal Reserve has been trying to provide the liquidity needed in the system to fix this problem. We are watching this closely – it is immensely important to the economy – but as of yet are not overly alarmed.  
I would like to take this opportunity to congratulate Cornerstone’s president, Skip Cowen, for recently being named as one Barron’s Top 100 Independent Wealth Advisors*. Skip will demur from this praise and point credit back to his team; however, it was he and Tom Scalici who, more than three decades ago, plotted the course of independence that has been our cultural bedrock. Skip is also the guy in the room that reminds us that scale is not the friend of personalized investment advice. We are thus mindful to ensure that our growth is focused on families and organizations that share our belief that a sound process, rigorously followed, should yield good outcomes. 
*As identified by Barron's, the ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms, and the quality of the advisors' practices. The scoring system assigns a top score of 100 and rates the rest by comparing them with the top-ranked advisor.  

Kevin Karpuk, CFA Chief Investment Officer

Kevin is Cornerstone’s Chief Investment Officer and is involved with the firm’s Investment Policy and Strategic Planning committees. Kevin joined the company in 2000 after graduating from Lehigh University with a B.S. and M.S. in Economics and earned his CFA charter in 2005. Kevin and his wife Kat support many charitable causes and have established a donor advised fund to propagate their philanthropic interests. They live in Bethlehem with their two cats: Zola and Charlyne, enjoy woodworking, gardening, reading and travel. Kevin is the proud uncle to many nieces and nephews and loves spending time with and spoiling them.

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