Over the past month, Bonds are up a bunch as the collapse in Interest Rates has resumed. We jumped on board this bond trade last month and so far it’s working.
Meanwhile, a majority of U.S. stocks are actually down over the past month. While the S&P500, Dow Industrials and Nasdaq100 have gone on to make new highs, the NYSE Advance-Decline line (stocks only) did not, Small-caps did not, Dow Transports did not, and a majority of individual stocks did not. It’s only a minority of names doing the work, particularly large-cap stocks and some higher dividend paying areas like REITs and Utilities.
When you run the numbers, most stocks in the U.S. are down over the past month, with negative average and median returns for the Russell3000 components. It’s the bonds that are up and I think they’re just getting started.
Today’s chart focuses on the Intermarket Relationships we lean on to supplement our absolute price analysis. With rates rolling over again, are stocks and commodities confirming what the bond market is doing? In a simple answer: Yes!
Up top we have a ratio of Regional Banks vs Real Estate Investment Trusts. When the market thinks rates are going higher, you’ll see banks catch a bid, particularly on a relative basis. When the market things rates are going lower, fixed income investors that aren’t able to get their yield in the bond market, go over to the stock market looking for higher dividend paying names. REITs are obviously near the top of that list and you can certainly see the strength there recently, while Regional Banks have struggled. Banks actually peaked 2 months ago!
The Copper / Gold ratio is another one very highly correlated to rates. The argument is Copper is representative of the global growth trade while Gold is the opposite. I don’t know that I buy all that, but the math is there and that’s all I’m really concerned about. Copper/Gold moves in lockstep with rates. So as the ratio roles over here again with Copper getting crushed, the commodities market is also pricing in lower rates.
What does this mean? I think it means we keep buying bonds. I laid it all out here last month.
Can stocks and bonds rally together like they did in 2019? Yes it’s certainly possible. But that is NOT the bet we want to be making here. We’ve wanted to take our foot off the gas in stocks and I think as money goes into bonds, it’s going to find its way out of stocks.
Another question I get is regarding gold. “Well JC if you like bonds here, you must like Gold too right?”
The answer is no. After being bullish for an entire year, we’ve preferred to be sellers of Gold since the end of the 3rd quarter last year. That has worked out in our favor. While Gold itself has held up okay, it’s made little progress in that timeframe. But more importantly, all of the other precious metals proxies are down: Silver, Gold Miners, Junior Gold Miners, Silver Miners, etc etc. They all look terrible. The way I see it, Gold (the metal itself) is the most “defensive” of that group. In other words, if there was real risk appetite for precious metals, we’d see it in the more aggressive vehicles. We are not seeing that. For me, it’s still $31 in $GDX. Until we clear that, I don’t see any reason to own these things.
Bonds have been the big winner so far in 2020 and I think this is just the beginning.
Tell me what you think! Do I have it wrong?
What are you doing March 9th?
If you’re in the New York City area, come hang out with Phil Pearlman and I in the afternoon. It’s free! We’ll talk charts and grab some adult beverages. Ping me and I’ll send over the details.