Deutsche Bank about the stock and bond market in 1994 and today.

“Traders and bond market watchers are talking more and more about 1994, a year when interest rates exploded higher completely obliterating bond investors. The event also came with sell-off in stocks.  But that eventually turned  into a buying opportunity. For months, the strategists at Deutsche Bank have been pushing this thesis  as hawkish commentary from the Federal Reserve have sent Treasury rates  higher. Here’s a slide from the firm’s latest “Equity View” report, summarizing their  case”:

 

stocks 1994

 

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What to expect from the second half of the year?

Mitch Zacks, Senior Portfolio Manager at Zacks Investment Management:The S&P 500 gained 2.4% in the second quarter. Like many equity investors, I am anticipating that the second half of the year will be far more volatile than the first half. The reason for the volatility is that interest rates are going to be rising, which will play havoc with the fixed-income markets, and the stock market will likely suffer collateral damage. In the end, my best guess is that the S&P 500 will end 2013 roughly 3-4% higher than current levels due primarily to the strengthening economic recovery.

Fluctuations in interest rates will remain center stage in the second half of 2013.  Usually, the ten-year treasury yield should be about 200 basis points, or 2%, above the inflation rate. Right now, as of the end of June, the ten-year treasury is yielding 2.5%. The problem is that inflation is not even close to 0.5%.  Most likely, depending on how it is calculated, core inflation is running around 1.1% annually and projected to rise to around 1.5% in the third quarter of 2013. This is below the Federal Reserve’s target of 2% and is also substantially below the average inflation rate we have seen in the U.S.  The current low inflation rate implies that the ten-year treasury should be over 3%. The reason the ten-year rate is not that high is Read more »

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