I mentioned in my last post an expectation that if the S&P 500 could bounce off of its 200 Day Moving Average, it would retest its recent highs. Well, it did, and it did. In fact, the S&P 500 even went on to set new closing highs in the interim. Yet here we are, a few months later, and the S&P 500 is back below its now pivotal high-water mark from January 2018.
Unfortunately, this, in and of itself, is not terribly surprising. As my previous articles indicate, it was actually quite expected. I do have a new concern, though. The one caveat that I built into my suspicion that that market was in for a very nasty tumble since at least November of 2018, was the chance that the Federal Reserve would begin to reassess its monetary policy and thereby provide the stock market with the sugar high it has thrived on for the last decade. As many are aware, the Fed has, indeed, reassessed its stance and effectively began to ease monetary policy by lowering rates back in July. The market has reacted in a less than reassuring manner.
As it turns out, given other risks in the economic world, stock markets demand more liquidity than central banks around the world are prepared to provide. This raises a second question: how much is enough? Or worse: is there enough?
Given the relationship between the Fed’s monetary policy and stock market performance since the trough of the last economic cycle, as I depicted here, I would expect that if drastic measures were taken and the Fed substantially eased its policy, the market would likely bounce to new highs once again…at least for a while.
The reality is that easy money was having an increasingly diminished return on stock market performance as measured by the total assets of the Federal Reserve relative to the value of the S&P 500 right up until the Fed went effectively neutral back in late 2014. Which, with the exception of the so-called Trump Bump (which many attributed to fiscal stimulus) that spanned about one year, is basically where the stock market stalled out. It appears that, to move higher, the stock market requires stimulus of some variety. It also appears that just enough stimulus to move markets higher continues to be an increasingly distant target.
Given this, it seems to me that the one thing we, as investors, can plan on is lower interest rates for the foreseeable future. If central banks want to juice equities markets, they must continue to ease, driving debt yields lower. If central banks don’t ease, equities – in my opinion – continue to languish or worse, and investors drive yields lower by making safe-haven bond purchases.
Given the current state of global bond yields – especially the yields of sovereign debt among developed economies – it is my opinion that the yield on U.S. Treasuries out to at least 10 years is close to zero if not negative by the trough of this current market cycle. I also happen to believe that in the absence of substantial Federal Reserve intervention in the very near future, this trough may be achieved sooner than many are accounting for.
All of this being said, although it is difficult to say where the S&P 500 goes over the next several months due to the possibility of strong Federal Reserve intervention, it seems to me quite clear that intermediate to long-term U.S. Treasuries have quite a bit of blue sky ahead of them.
Every investor’s financial situation is unique to their circumstances. No Part of this article should be interpreted as specific or general financial advice, nor a recommendation to buy or sell any security. Always speak with your financial professionals before taking any action that may affect your financial condition.