It’s been a while since my last market commentary, for the simple reason that nothing’s changed. As noted in yesterday’s Fed update, the Fed is still hawkish. It’s been historically hawkish since Jay Powell’s road to Damascus moment back in May.

Markets themselves have been on quite a wild ride, but contrary to media narratives, it’s not because the Fed’s messaging has been on a wild ride, but the media interpretation has been. It’s seized on every utterance or lack thereof to extract a dovish message where there was none, determined to take simple objective statements as code for hidden messages of impending “pivot”. Whereupon Powell or other speakers would ultimately step into provide a reality check. A couple of notable examples include Powell’s speech at Jackson Hole and yesterday’s press conference.

Possibly due in part to this market exercise in denial, possibly in part to the Fed getting a late start on its tightening campaign, the market turn we have been expecting remains firmly in the land of expectation. We have yet to see the whites of its eyes. In particular, a divergence in the course of stocks on one hand and bonds and gold on the other.

In general, there has been notably little movement between asset classes outside of the US dollar. The dollar has appreciated in relation to other currencies, in relation to stocks, to bonds, to gold, other physical commodities, even energy. The value of current dollars has even appreciated in relation to future dollars … in other words, the time value of money has itself undergone a tectonic shift. This is another way of saying that Treasury prices – the purest measure of that relationship – have fallen as yields have risen. In short the dominant story in financial markets for most of this year has not changed, and insofar as our wait for a big divergence goes, the next chapter is Not Yet.

Until we see the whites of its eyes, I remain cautiously positioned, using the broad Treasury fund GOVT for bond exposure. It has broadly outperformed stocks, as readers can see by charting VT relative to GOVT (for example StockCharts below). But long term bonds as of yet have not.

Synthetic Systems called for that turn around the beginning of this quarter. Over a month into the quarter, we might wonder whether such a divergence is still pending. The lower limit of SS’s timing resolution is about a quarter either way, so on that grounds alone it’s not time to throw in the towel. Our best interpretation of the SS take has been to expect bonds to outperform stocks over the span of several quarters.

But the more compelling case rests on fundamental grounds. For the opposite to be true – that stocks will outperform bonds – would require that the yield curve inversion we have seen – one of the most reliable forecasters of stock market underperformance – is for the first time in memory giving us a false positive. That the Federal Reserve could undertake the most aggressive hiking campaign in four decades and result in one of the mildest bear markets in stocks – from bubble levels – is all we will get. That corporate profits, if not squeezed enough by higher interest rates, will also not be squeezed by higher labor costs. That the Fed, which actively wants stocks to go down, will be denied. I would have to believe that not one, but all five, of these indicators will turn out to have been wrong to take the other side of this bet and overweight stocks instead of bonds.

What I’m looking for: The stocks to bonds ratio (VT:GOVT), down from a late March peak over 4.1 to currently 3.66, to fall below 3, a level last seen two years ago. Below this level stocks become more attractive than bonds.

This is particularly so in the case of the US; as we wrote in Where In The World Are The Cheap Stocks, the rest of the world’s stocks, largely on the strength of the dollar, have as a whole become attractively valued.

We can do a similar analysis with stocks as priced in gold. While gold sharply outperformed early this year, over the past few months it’s been zigzagging sideways … the bigger story has been the dollar. I look for further underperformance from stocks in relation to gold over the coming quarters, beginning with a downward inflection in the trend of stocks relative to bonds and gold. Looked at the other way, for gold and bonds to outperform stocks.

All things considered, the current bear market in stocks is about half way through. The second half will differ from the first in that it will be a proper stock market decline, in contrast to a bull market in dollars in which dollar prices of assets declined across the board. We pause at half time awaiting the second half kickoff.

When? It’s already overdue, and likely will happen this quarter, but could be pushed out as far as the first quarter of next year. But the most precise answer has already been given away  … when we see the whites of its eyes.