Stocks traded lower with selling accelerating into the close as Chinese lockdowns crimp global growth expectations. Energy took a tumble as Chinese demand is expected to wane after a fresh wave of COVID lockdowns.
Is it run and done, then? Not sure how I ended up on the Sirius XM station the other day, but I landed on “80’s on 8”, and you know what? I took my hand off the dial and rocked out for the entirety of my commute. I fondly recalled those days. Never mind my blonde hair, that alone was a sight. It is clearly no longer blonde, and I have quite a bit less of it… quite. We were at a tense time in the cold war. The nuclear threat was real. Computers were not quite in homes just yet, though I was fortunate to have an Apple II. Telephones were still attached to walls. Most folks were satisfied with 7 or 8 TV channels, though a lucky few had cable television which upped the tally by maybe 20 channels…I had to be satisfied with 7. Inflation was a bit of a problem in the early 80’s and an aggressive inflation-fighting Fed engineered 2 recessions to bring things back in control. I was happy with my minimum wage summer job which landed me $3.35 an hour. I was enjoying my daydream and Sting’s song “Russians” from his Dream of the Blue Turtles album was playing and I suddenly found myself in my driveway. Turn the clock forward 10-hours, and here I am writing my morning report. I am pondering the Consumer Price Index, which we are going to get this morning and is expected to show that prices grew by +8.4% from a year ago. That is not a small number. For some reference, the last time inflation was at those levels was in January of 1982, some 40 years ago!
Ok, ok, even if you occasionally read my daily note, you should not be surprised by this revelation. Inflation is on the climb. A wicked combination of post-lockdown demand, trillions in stimulus dollars, and a gummed-up supply chain has caused prices to jump higher. A war in Ukraine has pushed prices of all sorts of commodities, energy chief among them, which has further accentuated the daily burden on our pocketbooks. The Fed, which helped turn the economy around and fueled its rise, has turned the corner and is now pressing on the brakes hoping to tamp down inflation. Once the Fed signed on to be inflation buster, longer-maturity yields began to climb. The rises in yields slowed the bullish progress of stocks, particularly growth stocks, which are sensitive to rising yields. Though the inverse relationship between yields and growth stock prices is purely theoretical, the markets have certainly sent a clear message as recently rising yields have caused sizable pullbacks in stocks.
In my morning research, I came across a chart which showed 10-year Treasury Note yields going back to…you guessed it, the early 1980s. I recreated it below and drew a trend-line. At a high level, what this shows is that we have experienced 4 decades long bull market in 10-year bonds. Remember that when bonds rally, yields go down. Those yields had gotten as low as 0.5% in 2020! Think about it. We had a 10-year maturity Treasury note which yielded just ½ a percent! But as you know, that didn’t last long as we emerged from pandemic lockdowns and the economy took to flight once again. Higher inflation meant that bond holders would require higher yields, and those yields raced higher. When the Fed released the minutes from its last FOMC meeting last week, it became clear that the central bank was preparing to start selling bonds from its approximately $8.5 trillion balance sheet. The once big buyer now big seller would certainly have an impact on the bond market. That pushed yields yet higher. Let’s look at the chart. The red dashed line is the long-term trend, and we can see that yields bounced up against this trendline several times in the last 40 years, almost, but never breeching it to reverse the trend. I scratched in 3 points to note. Point A is just prior to The Great Recession when housing prices were in a massive bubble. Point B occurred as the Fed was aggressively hiking rates and selling treasuries from its last quantitative easing venture. Stocks tumbled in December of that year causing the Fed to shift its policy from tightening to easing. The markets turned around in 2019 and the Fed ultimately began lowering rates by the summer. Bond yields eased once again. Now we find ourselves at Point C, right up against that trend-line which has held for the past 40 years. The Fed has more tightening to do, and it is expected to raise key lending rates by a half percent next month. It is also likely to start selling as much as $95 billion in Treasuries and mortgage-back securities.
Will this trend, this 4-decades long trend, finally be broken? If it is broken, many ponder by how much. Those are 2 very difficult questions to answer. We know one thing for sure. If the economy begins to stall in response to the Fed’s aggressive tightening, yields will begin to fall once again. Once again clearing the path for stocks to climb. Shall I describe another trend? During that 40-years the S&P500 grew by some +3,300%! Ok, so, you don’t want to wait 40 years? How about 10-years. The first 10-years returned +323% and the subsequent 3 decades returned +288%, +37%, and +281%. New trendlines will be made and broken, but patience and long-term focus remains the constant for success in investing. Last night’s playlist also included “The Future’s So Bright, I Gotta Wear Shades”, the 1986 hit.
YESTERDAY’S MARKETS
Stocks traded lower yesterday after China expanded its lockdowns causing energy to tumble while bond yields continued to climb putting pressure on stocks. The S&P500 fell by -1.69%, the Dow Jones Industrial Average traded lower by -1.19%, the Nasdaq Composite Index dropped by -2.18%, the Russell 2000 Index declined by -0.71%, and the S&P500 ESG Index gave up -1.87%. Bonds fell and 10-year Treasury Note Yields added +8 basis points to 2.78%. Cryptos fell by -7.87% and Bitcoin lost -7.60%.
NXT UP