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Bond Yields Are Sending a Scary Signal on Stocks

This article provides some talking points for stock market skeptics. A couple of excerpts:
...yields on 30-year government bonds started to decline on Jan. 2, anticipating the fallout from the budding coronavirus crisis that had taken hold in China. Yields fell from 2.34% on that day to 0.94% on March 9, as the price of the benchmark 30-year bond leaped 29%. Only on Feb. 19—seven weeks later—did the S&P 500 Index begin its 35% slide. Fast forward and 30-year yields have fallen from 1.66% on June 8 to a recent 1.19% as their prices climbed 9%. The question is whether stocks will follow again, and with a similar lag of about seven weeks. The fundamental economic scene favors a repeat.

Recall the craze for Socks the Puppet and his dot-com buddies in the late 1990s. When that bubble broke, the Nasdaq Composite Index plunged 78%. Also recall the so-called Nifty Fifty group of stocks in the early 1970s. When the only companies of interest to investors made gimmick cameras, ran amusement parks and built motor homes, it was clear the basic economy was in trouble. What followed was the severe 1973-1975 recession and deep bear market. I believe the bond rally signals a renewed drop in stocks, with the S&P 500 down 30% to 40% from here as the great depth and length of the recession hits home.
https://finance.yahoo.com/news/bond-yields-sending-scary-signal-100003918.html

Comments

  • Personally, I'd love a plunge since I'm sitting on (for me) a lot of dry powder, but this guy Gary Schilling is a permabear, if you google him you'll see he's been calling for a crash since, well, forever.
  • The article made only a passing reference to the ongoing fiscal stimulus being provided to the economy. At least a sentence or two more with some counterpoints about why the stock market will decide to ignore that stimulus would have been helpful. Here is a little of what Ed Yardini is currently writing about Modern Monetary Theory (MMT).
    So far, all the government stimulus has provided some support for the global economy. But the virus is still out there, and so are the recessionary forces. As a result, price inflation remains subdued even though much of the ballooning fiscal deficits are being financed by central banks’ purchases of government securities, which MMTers also support. In Kelton’s dreamland, that’s a perfect outcome, because she and her merry band of arm-linked MMTers believe that the only limit on deficit-financed government spending is price inflation. Sure enough, the US government has responded precisely as she advocates, producing one stimulus program after another. Another one is imminent, sized to the tune of $1.0 trillion, which will most likely cause the Congressional Budget Office to raise its current fiscal 2020 budget deficit estimate from $3.7 trillion to $4.7 trillion
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    blog.yardeni.com/2020/07/welcome-to-oz-where-mmt-enables.html

  • and the usual, stocks continue to go up...it's already months when you could find every other day articles why stocks are over valued
  • Let's not confuse stocks "continuing to go up" and "value". Value, as used here, is defined as "the material or monetary worth of something".

    Note the "or": the definition does not say "the material and monetary worth of something".

    The monetary worth of the stock market is going to be whatever the gamblers currently drive it to.

    The material worth of the stock market will be established when the music stops.

    (That's not to say that money can't be made here... just be very careful.)
  • Old_Joe: I'm a value investor, but Value has been taking it on the chin for quite a while.
  • edited August 3

    Old_Joe: I'm a value investor, but Value has been taking it on the chin for quite a while.

    +1 I keep hearing for years the following
    1) what about value and growth beat it by so much
    2) the market is expensive but it keeps going up
    3) rates can only go up but they keep going down and why bond have been doing great
    4) PE,PE10 are high, inverted yield signals the next meltdown and...stocks go up
    5) diversification is great and it wasn't and I'm talking about wide indexes such as SC, MC, international. The SP500 had better performance with lower volatility.
    6) Inflation will be higher and kill the economy and it's not high for years.

    These "experts" missed the fact that the Fed is controlling these markets since 2009 and conventional ideas are not working.
    Basically, I disregard all "experts" and articles, their job is to sell you something and/or can't predict the future and definitely can't predict what will happen in the next several months;-)


  • edited August 3
    I'm simply pointing out that if the actual monetary worth of a rock used for making cement is 10¢, then it's material or intrinsic worth is 10¢. If, at any given time, speculators believe there is going to be a shortage of these rocks, and bid the temporary monetary value up to $10, that's all fine, but the actual value of that rock is still 10¢, which it will return to once the speculative bubble bursts. The price at any given moment has little to do with it's actual intrinsic value.

    As I said- it's certainly possible to make money in a bubble- just be very careful.
  • These "experts" missed the fact that the Fed is controlling these markets since 2009 and conventional ideas are not working.
    Basically, I disregard all "experts" and articles, their job is to sell you something and/or can't predict the future and definitely can't predict what will happen in the next several months;-)
    I'ld set the clock back to Greenspan. But that's just quibbling

    Under the circumstances I find I pay less attention to my portfolio than I have in years.
  • WABAC said:

    These "experts" missed the fact that the Fed is controlling these markets since 2009 and conventional ideas are not working.
    Basically, I disregard all "experts" and articles, their job is to sell you something and/or can't predict the future and definitely can't predict what will happen in the next several months;-)
    I'ld set the clock back to Greenspan. But that's just quibbling

    Under the circumstances I find I pay less attention to my portfolio than I have in years.
    I'm a trader and why I pay a lot more attention and YTD made more trades than my usual, getting out before the crash, trading stocks/ETF/CEFs in March and back to bond funds in April.
  • >> getting out before the crash, trading stocks/ETF/CEFs in March and back to bond funds in April

    again, you should do it for a living
  • +1 Yes-maybe FD1000 should start his own hedge fund and reap the benefits of the 2/20 fee structure.
  • with his reported performance, again and again, he has no need of 2/20
  • FWIW....

    Reading through some of these comments reminds me of the total return formula Jack Boogle often discussed:

    TOTAL RETURN = INITIAL DIVIDEND YIELD + EARNINGS GROWTH OVER THE TIME PERIOD + SPECULATIVE RETURN (CHANGE IN P/E RATIO OVER THE TIME PERIOD)

    The stock market currently appears to be comfortable accepting an elevated level of Speculative Return when valuing stocks. But, we may well continue to experience very low interest rates for an extended period of time. And, monetary and fiscal policies may well continue to be very supportive. So, the risk per unit of anticipated speculative return being taken by market participants may not be unreasonably high. Anyway, thinking this way leaves me feeling more comfortable with the current stock market situation. (But, I do continue to keep more $'s than normal in a money market account....just in case.)




  • edited August 5
    carew388 said:

    +1 Yes-maybe FD1000 should start his own hedge fund and reap the benefits of the 2/20 fee structure.

    It's documented in this thread(link)

    And thanks, I'm retired enjoying my free and happy time. I have given FREE advice to hundreds of posters who contacted me over the years.
    davidrmoran: with his reported performance, again and again, he has no need of 2/20
    Correct, my portfolio just passed 35 times our annual expense, and we didn't start taking our SS. The results in the last 3 years were beyond anything I anticipated.
  • edited August 5
    What??? What??? Say it aint so.... Is it possible FD screwed up??? Apparently he didn't figure things properly and has more money than he planned...could it be???? I guess that happens when you time the market perfectly, jump back and forth between the best funds at the perfect time, never lose money and always buy low and sell high like he does. FD did screw up.... he didn't retire early enough. ;^) ;^)
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