The upward pressure on global bond yields has intensified
Stocks rose last week (S&P 500 +1.17%). Equal weight was up for the first time in eight weeks, even though the Russell 2000 was down for the fifth straight week. Some signs of rate stabilization and improving breadth were encouraging. The best sectors were consumer staples (+3.99%), utilities (+3.97%), and energy (+3.62%); two sectors were negative for the week: industrials (-0.40%) and technology (-0.26%).
The upward pressure on global bond yields has intensified. However, bond markets are now oversold, implying good odds that yields will soon consolidate before another up leg occurs. Our expectation has been that bond yields will eventually rise to the point where something breaks; namely, risk-asset markets crack, followed by, at a minimum, an economic growth scare. As mentioned above, some credit stresses have started to emerge.
1 . The U.S. economy is in solid shape; recent data indicate that economic momentum is improving, driven by resilient consumer spending and broadening gains in manufacturing activity and business investment. Solid growth has inevitably boosted inflation, which in turn has forced the Fed to pivot, lifting its policy rate, and has contributed to a major rise in long-term bond yields.
2 . At some point, an economic slowdown will become increasingly likely, given persistently higher oil prices, central bank tightening, higher long-term rates, and a negatie U.S. financial impulse. But the slowdown is still likely not a recession because: 1) Credit conditions look reasonably benign, 2) consumer net worth is rising, 3) firing remains restrained, 4) gig work is still available, 5) new business formation is up, and 6) trend productivity growth is accelerating.
3 . Monetary policy may appear loose when considering some financial market indicators (e.g., equity market valuations), but it has been in restrictive territory for the U.S. housing sector.
4 . Global debt issuance as a percentage of global GDP is expected to jump this year to 23.3% (up from 17.5% in 2019). The only times it was close to this year’s high were periods of recession or crisis.
5 . Investor concerns about the fiscal and economic outlooks in France have mounted, along with rising bond yields. France remains a weak link that needs to be monitored.
6 . Bond bullishness is now in the 5th percentile over the last 10 years.
7 . The earnings yield using a 19x forward P/E is 5.26%, virtually identical to the yield of the 10-year Treasury. This makes bonds equivalent in valuation attractiveness to equities for the first time in two decades.
8 . The explosive pace of S&P 500 earnings growth is poised to slow in the coming quarters, as companies lap tough year-over-year comparisons, and the factors that have boosted corporate profits this year fade in strength.
9 . Information technology’s share of the S&P 500’s market cap rose to a record 39.3%, above the 2000 peak of 32.9%. The difference this time is earnings. IT accounts for 36.3% of the index’s forward earnings, a gap of just 3.0 percentage points. At the 2000 peak, the gap was 17.5 points.
10 . From mid-August to Oct. 6, the technology sector is +9%, while eight other sectors are -3% or worse and five are -5% or worse.
Source: Bob Doll, Crossmark Investments
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
Latest News
Microsoft plans huge deployment of its own AI chips, with an eye on saving costs
Microsoft announced the next generation of its custom AI chip on Monday and said it plans to deploy potentially more than a million of them next year to back its internal AI services.
Reuters
Starbucks says not buying Chipotle, ends takeover speculation
Starbucks is not buying Chipotle Mexican Grill , the coffee chain said on Monday, quashing talk of a deal that could have been the largest-ever involving restaurants but was doubted by both investors and analysts.
Reuters
