October 24, 2022
Good morning,
On Friday morning we observed the significant rise in yields in bond land for the week through Thursday, and the headwinds rising yields typically have on equity prices. We noted that all things considered, equities had made a good showing through the first four days of the week, especially considering the magnitude of the rise in yields on U.S. Treasures across the whole Treasury curve (meaning across all maturities from 1 wk, through 30 yrs). On Friday, the short end of the curve (considered 2 yr maturities) rallied massively and sent yields on the short end back to where they started the week, reversing the week’s entire selloff in bonds on the short end. Long end maturity bonds saw yields rise a little on Friday.
Normally, long term bonds yield more than short term bonds. Investors are normally compensated with higher returns the longer they lend money to the bond issuer. Not normal is when short term bonds yield more than long term bonds (known as an inverted yield curve) – it is often a sign of an impending recession. The treasury curve has been inverted since July. On Friday, the amount of inversion was cut in half. The equity market likely interpreted that move in yields as a sign that the bond market may see a lighter recession ahead than what they had been anticipating only a few days earlier.
The S&P 500 rallied +2.4% on Friday, and +4.7% on the week last week. The Index is now +7.5% off its 10/13 low. A rally in equities seems to be upon us. Can it last a few weeks into yearend – yes. Is it probably another bear market rally like the previous three rallies this year? Right now, the data leans toward another bear market rally. Let’s take what we can get from this rally. On Wednesday I’ll present some very geeky charts and signal changes needed to argue the rally is more than the bear market kind.
Be well,
Mike