Most of the financial headlines this month have focused on the volatility of the stock market but Frank Trotter, chairman of EverBank Global Markets, isn’t fretting the drop in the Dow Jones industrial average or S&P 500 index.
Trotter is watching yields on U.S. Treasury securities.
“I obsess about it a little bit but it really tells the story,” Trotter said Thursday at a luncheon meeting of the North Florida chapter of the Association for Corporate Growth.
He said the yield on 10-year Treasury notes is about 1.9 percent, which is the lowest it’s been in 55 years.
The yield is normally about 1.6 percentage points higher than the expected inflation rate, so the low yield suggests investors are expecting inflation to remain extremely low over the next decade, Trotter said.
“That is one of the key messages in the market,” he said.
Trotter sees a continued period of slow growth in the U.S. economy.
“I think we are going to have a muddle-through economy, but I think that’s optimistic,” he said. The pessimistic view would call for a recession.
“We could go into recession but we’re a little bit more optimistic than that,” he said.
The year began with expectations that a steady economy would prompt the Federal Reserve Board to continuing raising interest rates, but Trotter said the early volatility in the markets makes that unlikely.
“Just to be clear, we don’t think there’s going to be any more” interest rate hikes, he said.
With the U.S. presidential election on the horizon, he also doesn’t expect to see any major action by lawmakers in Washington this year.
“Politics make it very difficult to get anything rational done,” he said. “I think it’s going to be a dead year.”
Trotter didn’t say much about his outlook for the stock market this year during the luncheon at the The River Club Downtown. He did point out the Royal Bank of Scotland recently came out and warned it expects a “cataclysmic year” for stocks.
“That’s kind of a sunny outlook that’s out there on the market,” he joked.
Trotter did explain why investors are nervous about China, which has only had three years of negative gross domestic product growth over the last six decades. Indicators of slowing industrial production in China have raised concerns about a rare recession there.
“I think we’re really seeing the market react to that,” he said.
After the meeting, Trotter said he wasn’t overly concerned about the early 2016 drop in U.S. stock markets because stocks may have been overvalued. He thinks price-to-earnings ratios of stocks have been too high.
“I think it (the market drop) may reset P/E expectations,” he said. “I think it needs to adjust.”