Evening Update 14FEB22
Sarcasm sparked a sell-off today. Also, there's many different yield curves.
“Subtlety has never been Wall Street’s strong suit, and when a dose of sarcasm crept into the high-stakes discourse around tensions between Russia and Ukraine, it briefly proved more than traders could process.”
The 2-year yield has been bothering me. I’m not sure what long-term rates will look like, but it’d be nice if there was a long entry somewhere. The market seems to be bullying the Fed into action.
Here’s a snapshot of the two-year treasury from earlier, and this kind of rise was quite surprising to see, but it’s important we zoom out, too.
The spread on 10s and 2s has dropped below 0 a few times, and has maxed out at around 2.8% in the modern era. It’s broken 0 three times in the past 40 years. BRIEFLY in August 2019, in 2006/7 before the GFC, in 2000, and in 1989.
Here’s a high-resolution chart of the 10/2 curve from 9/20/1985 through close today:
As for the famous recession indicator, 5s and 30’s are where I like to look. Here, we have data going back to 1970 on 5s and 30s, thanks to BofA.
They’ve actually tested a trading system that goes to cash or treasuries whenever there’s a yield curve inversion, and then bought equities when it reverted. I hear it didn’t go so well...
(The story goes, this trading system did great during crashes, but suffered the same problem that most humans do. It could never get back into the market in time, and missed too many big days. This handicapped the trading system’s returns. It’s an interesting story that I really need to look up. Every study has shown that timing the market isn’t a good idea. Following academia is probably best.)
Are we heading for a recession?
I think we might be, but I don’t think that’s what the yield curve is telling us. This kind of thing can take a very long time to play out, and if anything is difficult to time, it’s recessions and recoveries. We have negative real yields across the globe and the demand for US treasuries should remain very high. Whether we raise rates or not, US corporations would have no difficulties securing financing. The yield curve doesn’t like to account for real rates, although I’m sure it would, so long as it fit the recession timeline.
I think we’re seeing a ‘last gasp’ of sorts from a lot of growth stocks, many of which may end up as just “regular” stocks (if they were ever even profitable at all). Until we see antitrust enforcement, however, it’s hard to ignore the S&P 500. I’ve always just assumed that the lack of antitrust laws and enforcement is about investment flows rather than any sort of legal issue.
I’ve always wondered why they used 30s and 5s instead of another pair of tenors. I like 10s and 2s, and some people use 30s and 20s, 10s and 7s, 3s and 1s, 5s and 1s, or whatever else works.
Source: MishTalk
Of interest to me is whether we will see out-performance from ex-US stocks, as the US and ex-US markets have tended to trade the lead (EM has joined in, but can end in horrifying crashes). So far this year, the US has borne the brunt of the selling pressure, with some international indices still sitting in the green for 2022.
As always, I’ll be watching the value vs. growth story closely, as we’ve never seen a genuine stretch of out-performance from the “growth factor”. It’s always returned far less than the S&P 500 or the Dow.
Being able to diversify internationally would be great. Ideally, we’d have similar returns both within and outside the US. While the US has had some great runs in the past 20 years, it’s not something that’s traditionally kept up. At this rate, we may even have supportive yields for the fixed income portion of our portfolio.
It’s amazing what the US markets have delivered for returns on both equities and bonds in the past 40 years. I have a feeling that this won’t be easily forgotten.
It’s a great time to look outside the US for investment opportunities while staying invested, rather than trying to catch a falling knife. Seeing ex-US stocks at such a discount is a sight to behold. But so is a portfolio that only has a single equity ETF ($VT covers the entire world!) I have my doubts, but it’d be great to see. It’ll be a difficult task for the US markets to outperform in 2022, and they’re not off to a good start.
Anyway. Here’s that chart:
Thanks for reading. Please don’t expect me to post 3 times a day, I’m just having fun. Have a good night!
—Avery