December 7, 2022

A notice in regards to the monetary markets

The markets are closed in the present day in remark of former President George H.W. Bush’s funeral. Within the meantime, let me provide a quick few observations (pontifications?) about my sense of the fast and long run pattern.

First off, here’s a broad take a look at the final 10 years for the S&P 500 (blue, proper scale) and 10 yr Treasury bond (crimson, left scale):

The strikes within the bond market look exaggerated, as a result of the values are between 1.4% at its lowest, and 4% at its highest. Principally within the final 10 years yields on the ten yr bond accomplished their gradual decline from about 20% in 1980, then went sideways 2011 and 2017, and this yr began what I believe will likely be an equally long run climb (though whether or not they’ll peak in a couple of a long time at 6% or 600%, I’ve no clue).

In the meantime the inventory market quadrupled in worth (!), though with a couple of hiccups alongside the way in which, significantly in 2010, 2011, 2015-16, and this yr.

In different phrases, prior to now 10 years bonds paid you little or no, whereas shares rewarded you handsomely.

Subsequent, let me check out a couple of of these hiccups. First, right here is the 2010-11 interval:

Notice that on a number of events (roughly mid-2010 and mid-2011) shares declined by roughly 10%, and bond yields declined in tandem.

The identical sample seems in October 2014 and January 2016:

That is referred to as a “flight to security.” Inventory traders get spooked for some cause or different, and run into the relative security of bonds. Inventory costs fall, and bond costs rise, which suggests bond yields fall.

That’s what I believe is occurring for the time being. After a 40% run-up starting instantly after  the 2016 US Presidential election (20% of which was in December 2017 and January 2018 alone):

this yr shares have gone sideways in roughly a 15% vary:

Within the broad view, traders obtained too exuberant in 2017 primarily, I believe, in anticipation of the tax lower goodies, and as soon as the goodies took impact, realized that each one of their worth – after which some – was already priced in. Within the close-up view, the previous month appears like one other “flight to security.”

NOTE: Full hypothesis alert!: As a result of this stuff are inclined to inflict shock on as many individuals as attainable, my *guess* is that the carnage will proceed till roughly the second that 2 to 10 yr bond yields invert. Then, as soon as persons are positive that the top is nigh, each will reverse increased, at the least quickly ending the inversion.

Lastly, what can be fascinating about this yr is that it seems to mark a “change of season” within the relationship between inventory and bond efficiency. From 1981 by means of 1998, inventory costs and bond yields typically moved within the reverse instructions (shares up, yields down). Then, from 1998 till this previous January, bond yields and inventory costs tended to maneuver in the identical route — not every day, however within the longer view. This yr, as the primary and third graphs above present, inventory costs and bond yields have once more typically develop into mirror photos of each other.

This yr’s sample (with rising bond yields) final occurred within the Fifties, which was a interval of “reflation,” i.e., bond yields and the YoY change in costs step by step elevated. That’s another excuse why I believe we’ve began a brand new secular monetary period.

Finish of observations/pontifications.

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