On September 17, the benchmark 10-year Treasury yield ended the trading session at 4.47%, or nearly 80 basis points below the target Fed funds rate, which was 5.25% at the time. The yield curve, in short, was inverted and by more than a little. The next day, the Fed cut rates by 50 basis points, which was followed by another 25 basis point cut at the end of October.
Today, the Fed funds rate is 4.50% and the yield on the 10-year Treasury yield is 4.36%, as per last night’s close. The yield curve is still inverted, albeit by a smaller margin compared with September 17.
Meanwhile, the market for Fed funds futures seems to be inclined to think that another rate cut is coming. Perhaps, although the easy cutting is now behind us.
Lower interest rates invariably come as a package deal, with positive and negative effects. Enhanced liquidity has the power to boost spending, at least in the short term. But lower rates come at a cost elsewhere. Those costs have been minimized and largely overlooked in past years. But that was a function of the moment.

Times have changed and now lower rates aren’t the clear winner they’ve been in the past. Consider the battered dollar, which continues to plumb new lows against the world’s leading currencies, as the sinking U.S. Dollar Index shows. Yes, what ails the dollar goes far beyond lower rates, but the cuts certainly don’t help and may at this point be accelerating the rush out of the greenback.
In turn, the falling dollar is a contributing factor in the rise of commodities prices. The S&P GSCI Index, a benchmark of commodities, continues to reach for the stars. Notably, oil and gold prices are key elements in this ascent. The fact that oil and gold are priced in dollars suggests that as the greenback is devalued against competing currencies, the blowback will be pricing raw materials higher in dollar terms.
None of this seems to be worrying the stock market, which seems hard wired to accept only good news while ignoring the bad. If there’s some point that soaring commodities prices and a sinking dollar will affect Wall Street, that point has yet to be found.
But at some point the equity bulls will realize that stocks don’t trade in a vacuum. The trend of late in the dollar and commodities ultimately carry ramifications for the U.S. economy and, by extension, shares of U.S. companies. In fact, some corners of the stock market appear to be taking the hint. Of the 10 sectors that comprise the S&P 500, financials and consumer discretionary are down substantially on a year-to-date basis through yesterday. Everything else is running higher.
Indeed, the S&P is up 8.83% YTD. At this rate, 2007 may end up being one another strong year for U.S. stocks. Yes, the market has been known to climb a wall of worry. As such, one would be wise not to discount domestic stocks entirely. But the global portfolio of risky assets encompasses a broad array of choices in the 21st century. Meanwhile, if you’ve done nothing in your asset allocation in recent years, U.S. stocks’ weight in the portfolio have probably climbed. Rebalancing has never looked more alluring.
Of course, that’s a contrarian perspective at the moment. But if rebalancing doesn’t make sense now for U.S. stocks, when will it? Only the future can answer with definitive clarity. For the rest of us, we’ll have to work with imperfect information. Given the timing, we prefer to err on the side of caution. Does that mindset ensure that we’ll generate the highest gains? Probably not. But that’s not our goal at this point. Instead, we’re trying to preserve the wealth that’s been created in the past five years while trying to make sure we don’t end up in the bottom quartile of relative performance in the next five.
This, of course, is our bias, and it may or may not prove to be worthwhile. But one thing we’re reasonably sure of: achieving our objective from here on out won’t be easy or comfortable. Arguing with the crowd never is. Granted, sometimes it doesn’t pay to be quarrelsome, but sometimes it does. And this, we think, is one of those times.