• 507 days Will The ECB Continue To Hike Rates?
  • 508 days Forbes: Aramco Remains Largest Company In The Middle East
  • 509 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 909 days Could Crypto Overtake Traditional Investment?
  • 914 days Americans Still Quitting Jobs At Record Pace
  • 916 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 919 days Is The Dollar Too Strong?
  • 919 days Big Tech Disappoints Investors on Earnings Calls
  • 920 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 922 days China Is Quietly Trying To Distance Itself From Russia
  • 922 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 926 days Crypto Investors Won Big In 2021
  • 926 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 927 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 929 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 930 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 933 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 934 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 934 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 936 days Are NFTs About To Take Over Gaming?
  1. Home
  2. Markets
  3. Other

Conclusion from Swelling Stocks/Yields Ratio

As stocks hit a fresh record high relative to bond yields -- measured by the S&P500/US 10-yr yield ratio at 1081--the contrast between these two markets becomes palpable and the remaining conclusion for a stabilization in the ratio may not appeal to equity bulls. This is not the first time we see a new a high in the stocks/yields ratio, but plunging oil prices are certainly making this phenomenon less of an aberration and more of the new normal... until when?

Surging equity prices are normally a sign of improved investor confidence, while falling bond yields, accompanied by tumbling commodities suggest the contrary - disinflationary (or deflationary) pressures and slowing economic growth. If stocks were correct, then demand is supposed to be soaring and bond yields are rising or at least keeping steady--not falling across the board from 2-year to 30-year yields; and from Australia to Canada to the US.

The chart below shows the last time the SPX/10-YR ratio peaked out was in April 2013, when yields rebounded to the extent of lifting the ratio.

Today, a pullback in the SPX/10-YR ratio is unlikely to be brought about by a rise in yields due to the disinflationary of falling oil (15-yr lows in UK CPI, 5-yr lows in Ezone and US CPI), not to mention the deflationary impact from China as seen through the 6th monthly decline in Chinese imports over the last 10 months, which partly reflects waning Chinese demand and partly its weakening currency.

Since any real rise in bond yields is unlikely to be the catalyst to stabilizing the surging SPX/10-YR ratio, then a pullback in stocks is the more inevitable. And with emerging markets already struggling from costly USD-denominated debt financing, falling demand from China is the last thing they need.

S&P500/10-Year Yield Ratio Chart

Best

 

Back to homepage

Leave a comment

Leave a comment