Further market concerns

Paul Wildberger |
Categories
Investments
financial planning

Following up on yesterday’s note, I think it’s important to address macro-economic implications of what’s happening with rising bond yields.  Along with the decline in bonds is a sense of complacency amongst stock investors.  Consider the current headwinds and their previous impact on stocks, realizing that the S&P 500 is only 1% below its 52-week high:

  1. The rate/speed of bond yield increase is dramatic.  Just 2 weeks ago, the 10-yr bond was at 4.80%; today it sits at 5.20%.  That’s almost a half point increase and VERY significant.  A recent study by John Roque, head of technical analysis at 22V Research, highlighted examples of 16 previous times since 1970 that we saw rapid increases in bond yields.  And EACH one of the 16 times resulted in some type of financial crisis.  When rates climb at a rapid pace, history reveals something bad tends to happen.

  1. Iran and oil remain a conundrum.  When the conflict began and oil soared in the $100/bbl range, stocks declined precipitously.  Now, it seems to have become the new normal and we’ve adjusted our expectations.  Really?  Just as the interest rate LEVEL is not as important as the SPEED of the move, oil at the $100 LEVEL might be acceptable, but the DURATION of how long it stays at $100 is more relevant.  Oil has moved from the $70s to the $100s but essentially averaged in the $90 range since March!  That’s a far cry from the 2025 average in the mid-60s.

  1. Stock index valuations remain elevated and generally concentrated in large tech.  Strong earnings have driven higher prices, as it should be; however, we cannot dismiss the macro economy uncertainties before us.  A metric that we watch, and I have reviewed previously, is the ratio between the NASDAQ Index of primarily tech companies and the DOW Industrials Index of primarily, well, industrial companies.  Dividing the two indices, we see the NASDAQ level is 53% of the DOW Industrials.  My research indicates this level has never been breached, nor sustained as it has since I first opined earlier this year.  Even during the 2000 dot.com flurry, the ratio peaked in the 40s. 

My overriding message is we are entering a period of potential setbacks in the stock market and economy in general.  I dare not lay out a crystal ball prediction of what/when something could transpire, but do say with confidence, caution and prudence are merited here.