Charles Dow, the creator of the Dow Jones Industrial Average, also created the Dow Theory. Per Investopedia: “Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of significant market trends and the likely direction individual stocks would take.” The Dow Transportation Index is an integral part of his theory. With the growing importance of the service sector and technology, transportation holds less economic importance than in Dow’s days. However, trucking, rail, shipping, and other sectors are still valid indicators of economic activity. Accordingly, let’s dig into J.B. Hunt’s (JBHT) recent earnings report. JBHT is the fourth largest trucking company.
JBHT’s third-quarter revenue fell 18% from a year ago, and operating income is down 33% over the same period. Such poor results might lead one to believe the trucking industry is in trouble. Therefore, the economy will falter. However, while the industry is in an admitted “freight recession,” trucking is still heavily skewed by the pandemic. As Shelley Simpson, CEO of JBHT, details in the graphic below, the industry continues to deal with the effects of inventory shortages coupled with a boom in demand. Despite the poor results and trucking recession, shares of JBHT are only 5% from recent record highs and almost double that of 2019. In this case, Dow Theory may not be as valuable as times past.
What To Watch Today
Market Trading Update
Despite earnings coming in better than expected, the market continued to wrestle with its current trading range as higher yields weighed on the markets. Consumer Staples, some Healthcare, Energy, and Airlines were the clear winners yesterday, with the rest of the market mostly under pressure. Currently, the market lacks direction, but as we noted yesterday, we continue to see buying on dips, which suggests institutions are beginning to add exposures. We have several Fed speakers today, which could move markets along with another large batch of earnings data, including more regional banks. We will look for stresses that may occur from higher rates in the banking sector. Continue to manage risk accordingly for now.
Five-Year Treasury Notes Nearing 5%
The five-year U.S. Treasury note is closing in on a 5% yield. Given the rate suppression of the last decade, a five-year risk-free rate of 5% seems like an incredible opportunity. Is it? To answer our question, we share two graphs below. The first graph shows the spread, or yield difference, between the five-year note and expected inflation and actual inflation stands at 10-plus-year highs. As the three lines show, investors of five-year notes are receiving a 1.50% to nearly 3.00% premium to actual or expected inflation. Since 2010, on average, holders of five notes have received a discount to each of the three inflation indicators.
The second graph comes from our most recent article Bond Market Noise Hides Tremendous Opportunity. The article discusses our fair value bond model and shows readers that the current deviation from our model is the most in thirty years. We end the article as follows:
The noise in the bond market is thunderous these days as inflation is still well above norms, deficits remain high, and the Fed continues to promise higher rates for longer. Noise creates differences between the yield on bonds and their true fair value.
Noise is hard to ignore, but it can create tremendous opportunities!
The answer to our original question is yes; bond yields offer an excellent opportunity for those willing and able to look beyond today’s high volatility.
Treasury Bonds Or Houses, Which Is The Better Investment Today?
Historically, the answer is almost always a house. Buying and renting a house traditionally yields more income than owning U.S. Treasury bonds. Such should always be the case due to the extra risk involved in home ownership, rental transactions, and other potential financial difficulties accompanying owning and renting a house. Today, however, is not one of those times. The ten-year UST note yield is higher than the median cap rate per Reventure Consulting. The cap rate is a simple calculation measuring net rental income (rent less expenses) by the property value.
Per The Kobeissi Letter:
It should be no surprise that investor purchases are now down a massive 45% this year. As rates continue to rise, investors will continue to scale back.
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