Nobody Sees This Coming
Hey There,
The MOVE index, which measures U.S. treasury bond market volatility, just made a spectacular reversal.
This 22% drop over 2 weeks matches patterns seen in pivotal moments:
Understanding the Bond-Stock Relationship
When we flip the MOVE index and compare it to the S&P 500, a close correlation emerges.
When bond volatility spikes, as during the financial crisis or COVID, stocks typically decline.
Conversely, when bond market volatility stabilizes, the stock market tends to rise.
This relationship makes sense because bond market volatility essentially reflects interest rate uncertainty.
When interest rates are unstable, it creates a challenging environment for stock market investors to allocate capital.
The ideal environment for stocks is one where interest rates are stable.
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Recent Market Dynamics
Heading into the presidential election, we observed a concerning divergence.
Bond market volatility was increasing while the stock market was making new all-time highs.
Thankfully, this divergence wasn't extreme, which kept us cautiously optimistic.
Such a divergence also occurred in late 2021.
Back then, rising bond market volatility signaled rising inflation and aggressive rate hikes, while stocks irrationally hit new highs.
That disconnect led to a 25% S&P 500 decline in 2022.
However, the market's reaction to Trump's victory has been particularly favorable.
Despite concerns about potential government insolvency from proposed tax cuts, bond market volatility has actually decreased significantly.
The MOVE index's big decline suggests the market isn't worried about sovereign debt crisis scenarios that could have emerged from reduced government revenue.
This positive shift supports our bullish outlook on stocks.
Now the key question is: how long can this last?
Looking at the MOVE index's long-term chart, we see substantial room for further decrease in bond market volatility.
This potential decline could continue supporting stock market appreciation, a thesis we've maintained throughout the past year.
The perfect environment for stocks is one of stable interest rates, and current trends suggest we might be entering such a period.
The S&P 500's technical structure also remains promising.
The index has successfully reclaimed key support levels, reinforcing our bullish stance.
This technical strength, combined with decreasing bond market volatility, creates a potentially powerful backdrop for continued market gains.
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