September 29, 2021
Good morning,
At the market close yesterday afternoon, with the S&P 500 Index off ~2% on the day, it was also down 4.25% from its all time high set earlier this month. Although the down-5%-from-its-high threshold has been broached once, intra-day in the Evergrande sell-off last Monday, this bull market has still not registered a 5% correction on a closing basis yet.
Down 4.25% isn’t a lot, but this market seems to jump into the elevator shaft on its sell-offs and then takes the stairs on the way back up. That makes -4.25% feel earth shaking – the earth is spinning, but it isn’t shaking.
In line with stair-stepping upward, the market looks to start the morning in a modest bounce back fashion; yields are down a few bps (basis points) and stocks are up half a percent (+.50% vs yesterday’s -2% for perspective). Whether that lasts beyond the start of the trading session is anyone’s guess but once again, the market’s behavior is correction-like (drawdown-like if you will), and gives no signs yet of something worse.
Last week’s sell-off culprit was Evergrande, so far the market believes it will be a manageable circumstance for China and has seemingly moved on. This week’s sell-off culprit has been a light-speed, 25bps move up in treasury yields. For equity investors, the relevant question is “when will rising bond yields impact the trend of the stock market?” The answer is two-fold; first, for the broad equity market historically, when rates begin to rise, there is some cushion before the bond market derails the equity bull market. Clearly given yesterday’s speed and magnitude, there isn’t nearly as much cushion as there was last year (sensible since we’re deeper into the bull market). Second, the rise in bond yields is already driving leadership trends toward cyclical value from growth. This rotation seems to be part of a reopening 2.0 trade, which should be shorter and smaller than the 1.0 version of late 2020/early 2021.
Bottom line – there is not enough evidence yet of a change in trend to this bull market – we continue to ride out the bumps.
Once again, I expect to see you Friday.
Be well,
Mike