Why You Should Watch the Bonds and Central Banks Right Now

What a day in the stock market. If there’s one thing Wall Street hates, it’s a surprise…and they got one last night when President Trump followed up his China travel ban (barring U.S. travel through China by non-citizens) with a similar one for Europe.

As a result, the major indexes are 25% off their highs, and that’s bear-market territory.

So, I do want to remind everybody of one thing I’ve found in my 40-year career: Good stocks do bounce; bad stocks fall like rocks. I built my Portfolio Grader to tell the good from the bad. Go ahead and use it to monitor your stocks going forward; use my Dividend Grader, as well, if you’ve got income stocks.
I, for one, am still finding companies with superior sales, earnings and institutional buying pressure. My recommended stocks have not had their earnings estimates cut. And I’m preparing another recommendation for Breakthrough Stocks: a semiconductor company that’s expected to grow earnings over 65% this quarter. Click here for my free briefing on the Breakthrough Stocks Strategy and join us to hear my best pick for when the dust settles.

Now, when is it safe to buy? When we see two things:

  1. A technical reversal in the market. Yesterday, we were getting there, when stocks successfully tested lows on light volume. Now that we’ve hit new lows, we need to see another technical reversal.
  2. More volume to the upside than the downside. I’ve always found that buying pressure is the key. So, the “all-clear” signal is when that reversal comes with a larger quantity of buyers.

Ultimately, I think dividend stocks are going to lead us out. So, until we see the reaction to earnings next month, and even the Federal Reserve’s rate decision next week, I’ll be watching the bond market and the central banks. There’s been some developments there that you should be aware of.

First of all, the 10-year Treasury yield is sitting at about 0.80%, while the 30-year Treasury yield is at 1.39%. (This time last year, they were around 2.5% and 3%, respectively.)

So, I still fully anticipate that the Fed will vote to cut key interest rates by another 50 basis points. And, hopefully, Fed Chair Jerome Powell will provide more guidance on the steps the Federal Open Market Committee (FOMC) will take to combat an economic slowdown.

The Bank of England already made that size of a cut yesterday; they went from 0.75% to 0.25%! The European Central Bank announced a stimulus package today, given that it already has negative rates. And the Bank of Japan has been aggressively buying bonds. A lot of people in Europe, certainly, are saying they gotta do whatever it takes to stimulate the economy.

It’s going to be tough for Italy to grow because people are all hiding in their homes right now. The whole country is on lockdown. Interestingly, folks in Italy are being offered mortgage relief. If they can’t afford the mortgage because they’re not out and about working, they can actually skip their payments. That’s actually very nice of the Italian banking system. It’d be very interesting if that comes to America!

But the bottom line is that the central banks are offering plenty of liquidity out there to rescue the market. As long as they do, the bond market will be the oasis, near-term.

That’s fine for stock investors, and here’s why: The Dow has a dividend yield of 3.4%, and the S&P 500 yields more than 2%. If you want income to smooth out your portfolio, stocks are where you’ll find it. And the 30-year Treasury is only getting further and further behind the S&P. Ultimately, that’s a screaming “Buy!”

The other thing is, a lot of people are going to get relief from their mortgages. Even if American banks don’t offer explicit relief, like the Italian banks are, they can still refinance at much lower rates…or if they have adjustables, their rates are going to be falling automatically. This is all going to be putting money in people’s pockets. So, we really want to watch the consumer.

We did have some data come out yesterday, with the Consumer Price Index for February; it’s well-behaved, inflation is well-contained. Almost no one cares, though – everybody’s looking at the coronavirus and wondering about its impact.

As of this morning, there were only 1,300 confirmed cases of COVID-19 in the United States. The test kits have gone out; I’m sure that number is going to rise dramatically. But the United States is still an oasis amid the chaos you see in Europe and elsewhere.

I know it’s tough, but yields are going to save us. I’m very comfortable and confident of that. I just have to monitor the market technically to figure out exactly when that is going to happen. And I’ll be making the call in my future commentary.

Hopefully, with next week’s rate decision, the Fed does the right thing, and also provides really strong guidance. I’m still very, very bullish on the market long-term. We just need to see a good technical reversal with strong buying pressure.

In the meantime, the recommendation I’m preparing for Breakthrough Stocks has one of the best ratings out there. That’s not only on its Portfolio Grader Report Card, but also in Dividend Grader. Stocks that offer growth and income deserve a place of honor in your portfolio going forward.

But not a lot of folks have likely heard of this particular stock before. It’s not one of the better-known semiconductor companies…but it is one of the strongest. I’ll have all the details in tomorrow’s weekly update, so consider giving Breakthrough Stocks a try today.


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