• 141 days Could Crypto Overtake Traditional Investment?
  • 146 days Americans Still Quitting Jobs At Record Pace
  • 148 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 151 days Is The Dollar Too Strong?
  • 151 days Big Tech Disappoints Investors on Earnings Calls
  • 152 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 154 days China Is Quietly Trying To Distance Itself From Russia
  • 154 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 158 days Crypto Investors Won Big In 2021
  • 158 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 159 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 161 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 162 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 165 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 166 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 166 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 168 days Are NFTs About To Take Over Gaming?
  • 169 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 172 days What’s Causing Inflation In The United States?
  • 173 days Intel Joins Russian Exodus as Chip Shortage Digs In
What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

How The Ultra-Wealthy Are Using Art To Dodge Taxes

How The Ultra-Wealthy Are Using Art To Dodge Taxes

More freeports open around the…

  1. Home
  2. Markets
  3. Other

Bonds Continue To Flash Warning Signs For Stocks

Defensive Assets Strong Early In Week

Caution Flag

When investors are fearful, common sense tells us demand picks up for more conservative assets, which is exactly what happened early Monday morning. From Bloomberg:

"Signs of distress in financial markets are gathering force as concern over the state of the global economy deepens. The Standard & Poor's 500 Index declined as much as 2.2 percent, as U.S. shares joined a retreat in European and emerging-market stocks. Investors sought the safest assets, sending yields on Treasury 10-year notes to the lowest level in a year, and those on Germany's 10-year bunds to the lowest since April. Meanwhile, yields on bonds of Europe's most-indebted countries rose, while the cost of protecting against default by U.S. junk-rated companies climbed to the highest since 2012."


Red Flags In 2008

If you felt the economic outlook was uncertain and you wanted a relatively high degree of safety of principal, what investment might be appealing? Bonds with longer maturities that lock in rates and have a low probability of default, which sounds a lot like long-term U.S. Treasuries (TLT). When investors are very pessimistic and fearful, return of principal becomes highly important. Therefore, when fear increases we would expect to see defensive bonds outperform growth-oriented stocks. That is exactly what started to happen in a fairly convincing manner in late June 2007, when the S&P 500 was trading at 1,310. After the warning from bonds, the S&P 500 dropped an additional 42%.

TLT:SPY 2008 Chart


What Is The Ratio Telling Us Today?

The recent spike in the demand for Treasuries relative to the demand for SPY aligns with the bigger picture concerns outlined in this week's stock market video (below chart).

TLT:SPV 2015-2016 Chart


Investment Implications - The Weight of The Evidence

This week's stocks market video, recorded on Friday, February 5, covers the rationale for putting stocks on a "plunge watch" until conditions improve.

Since early December 2015, our market model has added to conservative positions (IEF), and significantly reduced exposure to stocks (VOO). We are happy to reverse that process when the hard evidence begins to improve.

 

Back to homepage

Leave a comment

Leave a comment