Market Update: Where Are We & How Did We Get There

It’s been a few months since our last market update in April. I wanted to recap a little from our last update, and also take some time to take a look at where we are right now, going on 9 years into a Bull Market.

We had identified some market trends last April. The 10 Yr Treasury was coming off of December highs (2.62%) amidst another Fed Rate hike, and subsequently had shown several lower highs in Feb & March and has gone down into the 2.30% range. We had indicated that this pattern of lower highs could indicate the testing of some lower levels (which it did a few weeks later as it went down below 2.10%). 

Also, the S&P 500 Etf(SPY) was around 235.00, and was showing a little bit of weakness and uncertainty, as it was hovering just under the 50 day moving average. Shortly thereafter, the equity markets jumped back above the 50 day average and since then haven’t looked back. 

Every dip throughout the summer has been bought. Even the global tensions with North Korea’s Missile Testing throughout several summer months couldn’t hold the markets down for very long, as the “Buy The Dip” mentality has been in full force. 

As we have rolled into the last quarter of the year, the S&P 500 is fresh off even further new highs at 259.35, and appears to be accelerating as there have been 7 consecutive weeks of newer highs. 

Surprisingly, bond yields have stayed relatively low, and have been range bound for the course of this year.  The 10 Yr Treasury is currently at 2.35%, which is a very similar level to where we were in April of 2017.

The notion of Stocks going up and Bond yields staying low is not the normal correlation.  The natural relationship is that when Stocks are going up, there is typically a decline in demand for safe securities like Treasury Bonds. The drop in demand for bonds typically pushes yields upward to attract more buyers.  Likewise, when fear is in the markets and stocks are going down, there tends to be flight toward safety, and this increase in demand typically drives bond yields down.

The charts below attempt to show this correlation. Below are 20 year charts for the S&P 500 and TNX, (10 Yr Treasury Index). The First 10 years show the normal correlation. (When stocks are going up, bonds yields are also going up, and Vice Versa).     

 (SPY) S&P 500 20 YR CHART (Weekly)

(TNX) 10 YR TREASURY INDEX 20 YR CHART ( Weekly)

However, over the last ten years, we see a deviation from this typical correlation. The Great Recession hit its apex in 08 & 09. Since that down turn, we’ve seen the Stock Market recover from recession lows and march up to all time highs. Yet at the same time, we have seen Treasury Yields grind down lower, and have actually set all time lows.

There is something extremely interesting to note. The S&P 500 was reaching an all time high (the index surpassed 217.00) when, the 10 Yr Treasury reached the all time low of 1.33% in July of 2016. 

Increased demand for US stocks was continuing to drive prices up as confidence in the recovery continued. And at the same time, increased demand for US bonds was driving bond yields down.

As mentioned before, this is not the norm. It makes sense for the stock market to reach highs throughout an economic recovery. But where did all of this demand for bonds come from? 

A large majority of the additional demand for Treasuries came in the form of organized purchases of US Treasuries by The Federal Reserve through several layers of Quantitative Easing (QE). (At this point, the Fed holds over $4 Trillion in Federal Treasuries)

However, the last round of QE commenced in 2014, yet Bond Yields continued to go lower and didn’t set the all time low until several years later.

Part of the answer lay out across our borders, and across the globe. We’ve become a global economy, and the landscape of sovereign debt across the globe helps to explain this further.

Sovereign Debt yields from Central Banks across the globe had plummeted to extreme levels throughout most of this decade. The most extreme was in 2015-2016 when a large number of Sovereign Debt yields were zero and some down in negative yield territory. 

This chart was posted in a Business Insider Article from June 2016. It shows 7 out of the 10 countries listed having over half of their sovereign debt at zero % or below.

  https://www.businessinsider.com/heres-why-the-collapse-in-global-bond-yields-is-so-significant-2016-6?r=UK&IR=T

I think sometimes I (we) forget that the Great Recession of 08-09 didn’t just hit us hard at home, but it had a global effect. Countries across the globe went through similar economic down turns.  However, as our recovery has strengthened, many countries’ economies have lagged, and growth has not caught up to where it is currently with US. 

As the Fed ended their Stimulus Programs at the end of 2014 here in the US, Central Banks across the globe continued their stimulus programs through bond purchases (which keeps yields down). As these bond purchase programs have been prolonged, yields continued to grind down to the aforementioned extreme levels of 2016.

Interest rates have come up since then, but as the below table illustrates, rates are still extremely low. This chart from Bloomberg shows current 10 Yr Government Bond Yields. Many of the countries with “Stable” Economies still have yields under 2%. Germany is at 0.37% and Switzerland is surprisingly still in the negative with (-0.15)%. 

Our 10 Yr Treasury has remained in the 2% range for a good portion of the past 6-7 years, with a few dips into the 1%’s along the way.

Naturally, it’s easy to see why funds would flow into US Treasuries when the alternatives for a safe haven investment have had much lower yields.

Obviously these are generalizations in looking at the markets as a whole over a period of 6-7 years.

 But overall, I think it’s clear that Funds are flowing into US Equities and Bonds. The continued rise in the stock market over this 9 year Bull Market, and especially recently, has been something to watch. However, this is not something that we haven’t seen before. The Bull market of ‘87-2000 lasted 14 years, and 1949-‘56 lasted 8 years.  

There are always going to be ones to try and call the top of the market.  But that’s happened throughout history and the markets have continued going up over the last several hundred years.  There is so much info flowing out through media outlets, and it’s very difficult to sift through what’s actually important.

As most of my Financial Advisor friends will say, it's impossible to time the market. The best advice I can give is that knowing your time frame for the funds that one wants to put to work in the markets is the most important thing.

Could we be in the middle of a Bubble? It’s possible. Could this Bull Market Run for another year or two, or even longer. It’s possible.

Looking back to the Crash of 08-09, there were a few that had identified the chink in the armor in the midst of what would send the markets imploding. With movies like the Big Short illustrating this, I’ve seen more and more attempt to do the same recently(as asset values have risen higher) and claim another collapse is imminent.

Who knows, some may already have identified something that will come to haunt the markets and we won't hear about until after. Or maybe that something will never exist, and the next downturn is just a simple recession without all the fireworks.    

As the developed countries have become more economically intertwined, it will be interesting to see where the markets go from here. Who knows….a butterfly far away could end up tipping the scales somewhere across the globe to a shift the markets in a new direction.