Mike
Lipper’s Monday Morning Musings
After Relief Rally, 3rd Strike or Out?
Editors: Frank Harrison 1997-2018,
Hylton Phillips-Page 2018
Preparing for Rough Seas Ahead
We had a “Relief Rally” up to the close of the US stock
market on Friday. Although most stocks rose, there was a change in leadership.
Many of the best performers were the kind of stocks an institutional equity
player adds to a portfolio to soften declining performance in a down-market
phase. The leaders did not have the characteristics of stocks leading a
brand-new Bull market. Everything changed late Friday, with Moody’s* announcing
the lowering of its credit rating on US Treasuries from AAA to AA1.
* Moody’s stock is held in client and personal accounts.
Not a total Surprise
In a May 8-13 Reuters survey, 54% of bond strategists were
concerned about the “safe haven” status of US Treasuries, a critical benchmark
for pricing global capital markets. In April the same survey had 47% concerned.
This was not the first group of worriers.
Consumer confidence in May fell to the second lowest reading
on record. Regarding Moody’s US Treasuries downgrade, S&P downgraded the US
Treasury credit rating in 2011, as did Fitch in 2023. Thus, the move by Moody’s
is the third downgrade or strike. The next critical question is the nature and
length of the expected decline.
Moody’s Answer
According to Moody’s statement, US credit “retains
exceptional credit strengths such as size, resilience and dynamism of its
economy and role of US dollar as global reserve currency.” Not surprisingly,
the US government’s view is that Moody’s is looking backwards.
Expecting this retort, Moody’s focused on expectations for the
future. They expect the Federal Deficit to reach 9% of the US economy in 2035,
up from 6.4% in 2025. Furthermore, they expect government revenues to remain
broadly flat, adjusted globally from negative. (To me this sounds like
stagflation, with both tax rates and inflation rising.)
My Call
Odds are, we’ve struck out and ended the inning, but not the
game. The absence of a structural recession/depression may keep an expansion in
the low to middle gains. Portfolios with over 10% in longer than 10-year Treasuries
should cut them in half.
How do you call it?
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Mike
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