Well it’s been a while since I posted, having been on holiday in Florida in February and March and catching up on all the undone chores back home in Pennsylvania since. But the markets haven’t taken any breaks. The first quarter saw a sizzling rally in stocks, mostly on a sharp reversal from hawkish to dovish tone from the Fed, which we last cited in The Fed and the Stock Market.
But my bigger picture take on markets hasn’t changed. Last fall in The Crash of 2018 and A Bull Market Is Born I asserted that stocks had entered a bear market and that bonds (US Treasuries in particular) had entered a bull market. Those whose market news is limited to US shores have since been peppered with stories of new stock market highs, but the broad global high water mark remains where is was before, January 26, 2018. Pedants could quibble as to whether the bear ended on Christmas Eve and a new bull market in stocks was born on Christmas Day, but until the world market makes new highs the question is academic. Even if new highs aren’t made soon we could still say the rally off the December lows qualifies as a bull market within a larger bear structure. In the end it doesn’t matter what we call it. The numbers are the only objective fact.
Bond prices meanwhile have continued to zigzag their way higher. The broad US Treasury index fund GOVT traded from a November low of $24.05 to as high as $25.29 yesterday. The yield curve has remained stubbornly inverted – even digging in deeper – at the short to medium end, with the seven year yield trading 15 bp below the one month, and the ten year only 2 bp higher. The steepest inversion is between six months and two years, with the two year yield a startling 27 bp below the six. This indicates the bond market is pricing in a reduction in short term yields in about six months.
That would be consistent with Synthetic System’s view of the stock market. The latest iteration run at the end of the first quarter foresees a sharp pullback in stock prices beginning right around that time in the fourth quarter: Quarterly Charts. Given their record, no one knows what surprises volatile leadership at the White House and at the Fed may have in store for us, or how the markets will behave, but we call it like we see it and our call right now indicates an extra measure of vigilance is in order.