Not Yet

In recent weeks we’ve highlighted the fundamentals supporting an outperformance of bonds relative to stocks. They give a good indication of the prevailing market winds over the next few quarters, but not so much on timing. Synthetic Systems suggested around the beginning of this quarter, but its timing uncertainty is a few weeks to as much as a quarter; although on the plus side it’s no more likely to be late than it is early.

We’re not there yet. Although the broad Treasury market (GOVT) has outperformed the broad stock market (VT) for several months, the longer term segment (VGLT) has yet to join in. Based on the fundamentals outlined in recent posts and comments (and possibly including comments to come below) I still expect this change of trend, but final confirmation will come when we see the whites of its eyes.

This bear market in stocks, like any, is punctuated by rallies, the nascent one of which could last for another few days to few weeks. At the same time rallying stocks keeps the pressure on the Fed to stay in hiking mode, which is overhead resistance to Treasury prices. So until this stock rally peters out, it’s unlikely bonds will see a large advance.

Yet the rate structure already embedded in the bond market leaves US stocks dangerously unsupported …  the bear market in bonds and their rise in yields translates into a much larger rate of discount on future earnings and dividends than is implied by current stock prices, earnings themselves which are likely to come in lower than widely expected. The Treasury market has revalued, foreign stocks have revalued, gold has revalued, US stocks  … well … they’ve only partially revalued, leaving this one asset class out of line with the rest. Wile E Coyote has yet to look down.

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