The equity markets are ripping higher once again, with the S&P 500 up nearly 1.40% this morning. The Ten Year’s yield continues to move higher backing up to 1.83% as of 11AM. Remember I wrote on February 3rd, that if the S&P 500 had a dividend yield of 1.87% it would be at 2300? I also said the truth was some in-between. I still believe that. I believe The Ten Year should probably be trading around 2% and the S&P should be trading somewhere around 2050. The S&P 500 Dividend Yield this morning is 2.26. The spread is contracting and now only stands at 43 BPS. It had reached a level of 74 bps on Throwback Thursday.
Just because Ten Year rates are moving up does not change my Fed thesis. To me we are still in a lower for longer period. The Fed will still in my opinion be on hold for the balance of this year. The bond and currency market still seems to agree with me. It is my opinion that we have further risk to deflation than inflation. The argument that the unemployment rate sit 4.9% does not paint the correct picture. The U6 level of unemployment sits at 9.9% and Labor Participation still is at 62%. Job creation in the US has been lackluster and been unable to keep up with the population growth. Which is the reason for the low participation rate.
Remember market can be just as violent going up as they can be going down.