Chart Everyone Should See On Stocks

October 24, 5:00 pm EST

As we’ve discussed the past two days, the catalyst for a stock market correction is rarely, if ever, one of the concerns that are “top of mind” in the market.

In this case, a China slowdown has been the target of a market fallout for eight years.  Stocks have gone up.  An implosion of the European Monetary Union has been predicted since 2011.  Stocks have gone up.  Currency and trade wars have been underway throughout the post-Great Recession environment.  Stocks have gone up.  A “hard Brexit” has been going to crush markets and the global economy since 2016.  Stocks have gone up.  A huge spike in inflation and interest rates has been guaranteed to be the punishment, for the decade of “irresponsible” money printing.  Stocks have gone up.

And with these things to obsess about, people have been steadily convincing themselves that a recession was coming (the opposite of what the data tells us) and that earnings were deteriorating or “peaking” (peaking earnings growth at 20% y-o-y is very different than peak earnings).   The recession and exhausting economic momentum stories are non-sense.

Short of a major economic blow-up, things are as good as they’ve been in more than a decade and getting better.  And for people that think another Lehman like moment could be coming (Europe, China, Brexit…), remember, part of the Lehman moment/global credit freeze, was driven by uncertainty about how governments and central banks would respond.  But we now know, very clearly, how they will respond to shocks.  There is no uncertainty.  They will do whatever it takes to maintain stability (re-write rules, whatever it takes), as they have over the past decade (post-Lehman) to avert further systemic shocks.

Still, all of the “what could go wrong” scenarios are what exacerbates the fear, after a decline in stocks gets started.  And in this case, as we’ve discussed, it looks very clear that both this decline, and the correction earlier this year, were triggered by Saudi liquidations (for fear of asset seizures).  And now we have panic-driven selling by uninformed investors.

Remember, most average investors are NOT leveraged.  And with that, they should have no concern about U.S. stock market declines, other than to ask themselves, “do I have cash I can put to work at cheaper prices?”

So with that, let’s take a look at the chart and see where this shake out might stop?  I think we’re close.

 

The above is the chart of the S&P 500 futures.  And you can see the big trendline that comes in from the 2016 lows.  Remember, in early 2016, the crash in oil prices were threatening the global economy (causing bankruptcies, and threatening sovereign defaults and financial system trouble).  Global central banks responded in coordination with a number of measures (with likely outright buying of oil).  Oil prices turned on a dime the day the Bank of Japan intervened in the yen.  The crisis was averted.

This is a big trendline, and it comes in just 1.4% lower from today’s low.  That would be an 11% correction in the S&P futures.

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Bonds Are High Risk-Low Reward

Since stocks dipped last week, I’ve heard the chatter (again) about how a 3% 10-year note has suddenly created a high appetite for Treasurys over stocks (i.e. people are selling stocks in favor of capturing that whopping 3% yield).

But in this post-crisis environment, a rise toward 3% promotes the exact opposite behavior. If you are willing to lend for 10-years locked in at a paltry rate, you are forgoing what is almost certainly going to be a higher rate decade than the past decade. If you need to exit, you’re going to find the price of your bonds (very likely) dramatically lower down the road.

Coming out of a zero-interest rate world, bond prices are going lower/not higher. Here’s the chart of the 10-year Treasury note (price). You can see we’ve now broken the three and a half decade bull market in bonds (yields go up, as bond prices go down) …

stocks

Bottom line: The bond market is the high risk-low reward investment in this environment. And there continues to be plenty of fuel for stock prices as money exits bonds.