Glamour Stocks Diverge from Bonds
The US market’s gains have been largely led by a few high-flying tech names. The bond market tells a different story.
I have two thoughts for today: One about US Equity stocks, and one about the world bond market.
Let’s start with US Equities. Normally when we talk about stocks, we talk about the fundamentals. The generation of cash flow and earnings and growth. But I want to talk about technicals today. They also matter – not as much as fundamentals – but one thing to observe about what’s happened this year: the markets have advanced, around the world, particularly in the US, and in the US that advance has been led by very glamorous, well known, large capitalization tech companies. They have led the average company and we call that a ‘narrowing’ not a breadthening of the market, but a narrowing of the market. The market has gotten less broad, and that tends to be a warning sign. When we go back through history and see these periods where just a few names tend to lead the market and bring everything else along with them, it tends to that there is not that support that we saw all during this business cycle, where the average company was doing even better than the broad indexes, which showed great breadth. So I want people to think about that technical matter as, sort of, a cautionary sign.
What about the bond markets? And worldwide we’re witnessing this – people have been predicting for years and years that interest rates would rise, we’ll see more growth, and that bond prices will fall. Well, even if you go back and look at a long-term chart of US Government Bonds, for example, you’ll see declining interest rates and a very favorable backdrop for owning bonds. Earlier this year that reversed, and the markets were very much jittery about interest rates rising again, and there was a lot of talk about inflation coming back to the world bond markets. Well that’s not what these bond markets are telling us right now – for the last few weeks, interest rates have been falling again. That’s telling us that the government bond markets in the US and abroad are not seeing an ignition of inflation coming back, not seeing resynchronized growth, and in fact maybe telling us that there’s slower growth ahead.
These are just two cautionary matters for people looking at new money to put into the markets – talk to their advisor and just to be a little bit cautious at this point.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor.