Karl Ritter von Frisch was a German-Austrian ethologist who received the Nobel Prize in 1973 for his work researching honeybees. Among many other observations, Frisch became most famous for decoding what has become known as the waggle dance. It turns out, unlike when many of us attempt to dance, the dance of the honeybees is very coordinated and contains significant information.
Frisch discovered that bees use dance to relay information about food sources. In essence, a foraging bee will return to the hive and perform a dance to communicate its discoveries. Different portions of the dance offer information about the direction of the food source relative to the sun and the length of the dance informs the distance to the food source. Most importantly, the more excited the bee is about the food source, the more rapidly it will waggle in order to grab the attention of other bees. If the food source is abundant, more bees will start waggling and help point the way.
If you have spent enough time in Finance, this dance may sound somewhat familiar. Each year someone is waggling with sufficient energy to point the way to an abundant source of returns. Others catch on and proselytize accordingly, and if you are early enough there is a feast. Last year we heard from oil & gas, before that high growth technology – and of course, we all remember the waggle of the crypto bros. So who is dancing the hardest right now?
The regular marketers of Wall Street all of a sudden seem awfully quiet. Even after the January rally produced countless bullish technical indicators for the S&P 500, the typical bees aren’t waggling with their expected enthusiasm. All we hear is crickets. As illustrated nearby, this is because the technical indicators are at odds with fundamental indicators displaying declining margins, an inverted yield curve and stubborn inflation. However, there has been one persistent voice over the last year coming from a more unusual place. Federal Reserve Chairman Jerome Powell is dancing, and his dance keeps gaining energy as he drives investors towards cash.
The unfortunate reality of our current market environment is that regardless of fundamentals or technicals, and although excessive valuations have largely come back down to Earth, all of a sudden cash is competing for assets. Therefore, on a relative basis broad market values look even less attractive than a year ago with cash yielding over 4.5% and climbing. The chart below shows the spreads between stocks, bonds and real estate compared to cash, and they are all approaching 20 year lows.
Jay Powell has been dancing vigorously for over a year. His energy is gaining strength and pushing cash to ever higher yields. For years cash was trash, yielding close to 0%. Now cash is the Queen Bee.
Important Disclosures & Definitions
Bloomberg US Corporate Bond Index - Measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
Cap Rate/Capitalization Rate – A measure of yield for real estate investments, the cap rate is the estimated annual net operating income for a property divided by the property’s market value.
Fed Funds Rate - The target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which the Fed suggests commercial banks borrow and lend their excess reserves to each other overnight.
Fundamental indicators – Includes economic, financial and other factors that investors may use to value a security and assess its investment potential.
Inverted Yield Curve – The Yield Curve is a graphical representation of the yields (y-axis) on debt instruments with different maturities (x-axis), typically with shorter term interest rates lower than longer term rates to compensate investors for interest rate risk. An inverted yield curve shows that long-term interest rates are less than short-term interest rates.
S&P 500 Index - Widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Technical indicators - A mathematical pattern derived from historical data used by technical traders or investors to predict potential price trends and make trading decisions.
Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.
One may not invest directly in an index.
AAI000230 | 6/30/2024