October 5, 2023
Good morning,
The S&P 500 Index’s 8% decline from its July 31st high has had an unfamiliar companion – at least for the past 25 years – rising bond yields. For much of the past quarter century, rising bond yields have been bullish for stocks because it meant deflationary forces were becoming less powerful.
This year, the script has flipped. The 10-year Treasury yield has jumped to its highest level since August 2007. Rather than being seen as a bullish statement on economic growth, today it is being interpreted as a bearish development because inflationary pressures may force the Fed to tighten monetary policy more than previously expected. With the new correlation between stocks and bonds well established in recent months, it is hard to see stocks rally much without yields falling sometime in the foreseeable future.
The current correction, the second of the year, has pushed investor psyches into the extreme pessimism zone on sentiment charts. Students of the contrarian nature of investor sentiment know that pessimistic sentiment by investors is usually bullish for stock prices.
Treasury bond futures have tumbled 17.5% in price since their April 6th high, so it should not come as a surprise that investors are also pessimistic toward bonds. In fact, UST futures sentiment has recently registered deeper pessimism readings than stock sentiment charts. From a short-term perspective, the setup for a fourth quarter or year-end rally is firmly in place from a sentiment perspective.
I promised a look at the macroeconomic picture today. With apologies, it will be in Monday’s note, and my hope is that it will be embedded in the reprint of a monthly letter. I’ve fallen behind my own schedule this week as I prepare to be on the road beginning this morning (at 30k feet as I type) and through mid-week next week. Have a good weekend – see you Monday.
Be well,
Mike
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