This winter’s parabolic surge in 2-year Treasury yields ended with a climax on Thursday 9 March and Friday 10 March. That week, the failure of the Silicon Valley Bank completely rocked the market and convinced traders that the Federal Reserve would be forced to begin a cycle of rate hikes and a reduction in the hawkish rhetoric that accompanies it. By the afternoon of Sunday, March 12, the FDIC had stepped in and dissolved the bank. It’s over. A few weeks later, First Citizens Bank announced an agreement to acquire the remaining assets of its branches, customer deposits and employees.
The bond market reacted swiftly to these developments, with yields dropping sharply just before the bailout while several other banks capsized, sending chills to traders of ages remembering the harbingers of the 2008 financial crisis. attacked. Bond prices rose as capital fled to safe havens. Interest rates on government bonds fell in proportion to the rise in prices. Suddenly, inflation was no longer the biggest risk in the market.
That weekend, I announced the arrival of the 2-year Treasury all-time high. Not forever, but for a while. You can read the work here.
Given all the concerns about the economic impact of systematic mounting, this was not a very courageous decision. But anyway, it was right.
The trends in 2-year JGB yields since then are as follows.
The lowest was 3.75 and has not achieved 5% since. The overnight rate (or federal funds rate) is currently at 5.5. Despite recent strength in the labor market and a host of upside economic surprises, stocks can no longer drive higher over the next two years. It looks like the early March surge was still the high of the cycle.
What’s even more interesting is what happened in the stock market since the 2-year Treasury hit a new high, and one I didn’t expect.
The Nasdaq crashed.
Orange, the Triple Q ETF surged 22% and took off like a rocket as the bond crash began (purple).
I wouldn’t give the bond market full credit for a comeback in big growth stocks after March. A few other things happened. First, when first-quarter earnings were released in April of this year, we learned anew the difference between economic data and the resilience of the American corporate profit machine.
Despite slowing demand and cost pressures, U.S. management turned out to have plenty to pull back. A six-month layoff contributed to both earnings stability and multiple sentiment-driven expansions. The index-weighted giants managed to achieve profit figures despite challenges in sales growth. it was very important. Analysts had expected S&P 500 earnings to fall 7% year-over-year, but by the time we got our last report, they were down nearly 2%.
Additionally, it’s important to remember where you started. The meta was at an almost 80% drawdown from the highs. Amazon and Alphabet have halved. Even Apple is down 30%. The overall Nasdaq experienced a 35% peak-to-trough decline from November 2021 to October 2022, and had yet to recover significantly in early 2023. There was plenty of upside and little enthusiasm for stocks to rise. When these stocks started to outperform expectations, the impact was like a powder keg popping. Oh wait, Microsoft is still great. No, no.
We also experienced a once-in-a-lifetime moment of technological awakening when the ChatGPT phenomenon began to capture the public imagination. Suddenly, CEOs started talking about the enormous potential of AI, which led to a trail of every company making serious efforts in AI. At the center of it all is large-cap technology. Nvidia’s explosive earnings report, in the midst of which he doubled his forward guidance, confirms that the hype has a solid basis in reality. The company increased its market capitalization by $200 billion in just one day, a milestone unprecedented in the history of the stock market. AI wasn’t just a subject, it was a definite business opportunity here and now. The stock prices of hyperscalers like Alphabet, Amazon, Microsoft and Meta have gone absolutely crazy. you had to own them.
By late May, Wall Street strategists began raising (yes, raising) their earnings forecasts and year-end targets for the S&P 500. By early June, Wall Street economists had followed suit, raising their GDP forecasts to match the stock market’s optimism and reducing the likelihood of a recession.
We are now in a situation where the underlying strength of corporate earnings growth can be maximized. At the same time, declining inflation is becoming evident everywhere (inflation topped 9% last June and is rapidly heading toward a 3-handle, according to consensus expectations). April’s inflation rate, reported last month, fell for the 10th straight month. This Tuesday, the CPI is expected to be 0.3% m/m, equivalent to an annualized inflation rate of 3.7%. Core inflation, which excludes food and energy, is expected to be in the 5% range, still high, but not high enough for Fed leaders to go on endlessly suggesting rate hikes. Upside shocks could probably undo some of the recent rally in stocks, but not much of it.
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