It was not that long ago when the 10 year U.S. Treasury bond was over 3%. The expectation was that it would continue to go higher as the economy improved. The drop in the rate is a clear indicator that there is a flight to safety, as more money is flowing into the safest types of bonds. These include U.S. Treasuries as well as U.S. Corporate investment grade bonds.

Looking around the world, it seems clear why we would see this flight to safety. The economy in most of the world is either in slow growth, no growth or declining (Europe). Worldwide unrest and fighting have added to the fears of many people. What is harder to understand is why the U.S. stock market is faring so well. At the end of the last quarter, the S&P 500 stood at about 1960.  At the close on Friday, August 15^th, it was at 1955. (As I am writing this blog, the S&P 500 is up at 1969.) Now in all fairness, the S&P 500 did decline from the end of June until August 7^th, when it reached a low of 1909.

Since that time it has been moving up. It may be hard to understand how the U.S. markets are doing so well when it’s not the case around the world. The answer may lie in the fact that U.S. consumers have reduced debt, are spending more, home building is increasing, construction projects are increasing and there is a sense of a growing economy. With 4% growth in the second quarter and likely growth of 3%+ this quarter, the largest economy in the world is growing.

Given how fragile the recovery is in the rest of the world, this may bode well for the Federal Reserve being less likely to raise short term interest rates anytime soon. That in turn will continue to stimulate our economy. We have come a long way from 2008 when the economy took a nose dive.

Ed Mallon

posted August 19, 2014 at 12:20 PM