March 23, 2022
Good morning,
World bond markets collapsed Monday with 2yr treasury yields, for example, rising from 1.93% to 2.11% in a matter of hours. Equities were flat on the day. The selloff in world bond markets deepened yesterday, putting short-dated Treasuries (2yr) on track for their worst quarter performance in almost four decades. Global stocks rallied on the day with the S&P up +1.13% and NASDAQ gaining +1.95%. Bond yields up – stocks up – not very common.
At the beginning of this year, 10yrTreas yields started at 1.50% and quickly moved to over 2% in 6wks. Stocks as measured by the S&P declined 7.5% during the same period while more speculative stocks declined 20%, 30%, and 40%+ over that time span. Ten trading days ago, 10yr yields were 1.80% (they improved a bit on the onset of war) and closed last night at 2.38%. The S&P is up 8% in the past 7 days, NASDAQ is up 12% in the past week. What gives? Are stock investors dummies as bond speculators often contend (remember Liar’s Poker?)?
A cardinal rule of investing is to never call any regulated, auction based market as plainly wrong. Most of the time, when you make a trade or investment because you think a market is acting the wrong way, your account value declines. Markets aren’t wrong, they are just able to see further into the future than any one individual can. This can lead to some very unusual circumstances – like the ones we are living through today described above. To recap: yields up +50 bps in 6wks – stocks down -7.5% minimum in Jan/Feb period (normal behavior btw). A month later: yields up +60bps in just over a week – stocks jump up +8%+ (abnormal behavior btw).
There has been a lot of pessimism, even before the scary Russian invasion. Bad news from “crisis events” is usually priced in quickly. The extreme pessimism, that manifests as deeply oversold market conditions suggests that a lot of bad news has been priced into the market already. This may explain the current contradictory behavior of the market.
Let’s go one step further – last week the S&P 500 ripped off four consecutive gains of at least 1%, a feat accomplished only four previous times in 85 years. The previous four times, the S&P 500 soared a median of 17.0% six months later, posting double-digit gains every time. One year later, the S&P 500 has gained a median of 27.5%. A sample size of four illustrates the rarity of the event, but it does not instill much confidence as an indicator. What is perhaps more impressive was that the rally pushed two breadth thrust indicators to register bullish signals. The record for these two thrust signals is very good as an indicator, although not perfect. Both indicators suggest many weeks of strength. Although the evidence so far will likely not be enough to turn the trend from neutral back to bullish, a lasting rally that may repair much of the damage done in the recent sell-off is a high probability at this time.
Let’s connect today’s two subjects already mentioned; sentiment and the tape. The sentiment picture today has rarely been more mixed across a time continuum. As mentioned, pessimism has been at an extreme short term but long term indicators (valuation measures like P/E and Book Values) remain just off their all time highs (optimism). The tape seems to be in a non-bullish trend but has just registered strong indications of good short term performance. Combined, this might suggest some smooth sailing for markets into the summer, with clouds and rougher seas forming later in the year. Maybe this is what a market that goes from 3 straight years of high-teen returns to a year or more of low single digit returns looks like – we’ll surely see.
Market data and stats mentioned above from Ned David Research
Be well,
Mike