In my last post, Still All About The Dollar, I highlighted that recent action in stocks was mostly an artifact of a change in the value of the pricing unit, based on like action in other assets like foreign currencies, bonds, and commodities. For most of the past year it’s been this way. The dollar strengthens, and prices of assets in dollars fall across the board. Episodes of genuine movement between bonds, stocks and commodities have been fleeting.

Cracks have been forming in this pattern though. Today for example stocks sold off sharply, while gold and bonds both went higher. There was no clear evidence of a broad movement in the currency. Is the cusp of the divergence we’ve been looking for?

It’s too early to say for sure. There are often days when cross asset moves occur, only to be reversed in the next day or so. Today’s news was dominated by a single increase in jobless claims … not much to hang your hat on. Another news item, though, was more along the lines of what we’ve cited as an expected driver of a genuine decline in stock values – independent of bonds or commodities – a plunge in corporate earnings, in this case, in the banking sector.

This stock decline bears close attention, because it was dismissed by some mainstream media observers as due to interest rate fears … the stock market’s usual bugaboo in recent quarters. But the bond market begs to differ … in fact bond yields declined across the yield curve. If it were truly “interest rate fears”, as opposed to corporate earnings fears, bond prices would be expected to decline along with stock prices. Instead, they rose.

It would come as no surprise if this move were reversed tomorrow. But each day it’s not, the possibility that stocks finally are beginning the long awaited second phase of the bear market, where they decline in their own right, has to be taken increasingly seriously.

If this turns out to be the case, stocks could easily see another 20%-40% decline. This would produce the tightening in financial conditions the Fed has been looking for, and finally justify the “pivot” that has been the subject of so much speculation. Free of bureaucracy and meeting calendars, the bond market has slashed rates already. The only trouble for the bullish stock narrative is stocks have to go down first.

In related news, Jay Powell in House Humphrey Hawkins testimony today said that no decision has been made about Fed funds for the upcoming meeting. He emphasized that rates are not on a preset course and that the decision will be based on the data available at the time. Having repeatedly urged exactly that (eg here & here & here) we can’t help but wonder if Powell’s been reading Financology…