• 8 hours The Shroom Boom Is Here To Stay
  • 1 day Biden Will Be A Boon For Solar Stocks
  • 3 days The Gold Rally Has Finally Run Out Of Steam
  • 3 days Citibank Analyst Predicts $300k Bitcoin By End Of 2021
  • 6 days Bitcoin Lives Up To Its Safe Haven Status In A Big Way
  • 6 days 14 Million People Will Lose Unemployment Benefits On December 31st
  • 8 days Why 12 Million American Millionaires Isn’t Good News
  • 9 days Big Oil Is Paying The Price For Investing In Renewables
  • 10 days The Banking Industry’s $35 Billion Gravy Train Could Disappear
  • 11 days Did Amazon Just Democratize Prescription Drugs?
  • 13 days The Private Space Race Just Got Very Real
  • 14 days Short Sellers Are Willing Big In This Turbulent Market
  • 15 days SpaceX Gets Go-Ahead To Send Humans Into Space
  • 16 days Saudi Arabia Lost $27 Billion In Oil Crash
  • 17 days China’s Big Tech Takes A Hit As Regulators Crack Down
  • 18 days Black Friday Could Be Retailers’ Only Hope
  • 19 days Why You Should Not Dump Your Stay At Home Stocks Just Yet
  • 20 days The Real Reason Why Uber And Lyft Stocks Have Soared Nearly 50%
  • 22 days Bitcoin Heads Towards $16,000 And No One’s Cashing In
  • 23 days Elon Musk’s $250 Tesla Tequila Is Already Sold Out
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