It looks like we have a victor from the latest battle in the bond market, and this round goes to the bears. After last week’s stronger-than-expected payroll report, we saw interest rates spike, and bond prices were crushed lower.
My cyclical factors were pointing to the dangers of this move, and while I still think there’s more immediate-term downside, we need to be alert for a temporary bottom to form in the next couple of weeks too. That said, I am looking for interest rates to eventually exceed their October 2023 highs, and in a way, the bond market is doing the Fed’s job for them. Some might take issue with that statement, but let me explain.
The yield curve is still inverted...
And, the 30-year Treasury is only yielding around 4.50%, while the 90-day Treasury Bill is still paying 5.50%. Once the Fed eventually pivots and cuts rates, they’ll be looking to re-steepen the yield curve. In other words, if long-term rates are higher when that begins, the central bank won’t have to hike as much.
So far, the news is all excited and market pundits are congratulating the Fed on achieving a “soft landing.” But I’m not the first person to tell you that the most dangerous words in this business are, “This time it’s different.”
It’s all about inflation now, and markets are completely at the mercy of it.
Consumption represents nearly 70% of U.S. GDP. If inflation starts to accelerate again, it’s going to change consumer spending patterns, which exposes the economy to a contractionary period. Naturally, this is going to have consequences for the stock market, and based on what I’m seeing now, this is already starting to play out.
The fact that gold keeps exploding to new all-time highs in this rising rate environment is probably one of the most significant macroeconomic developments in months. Silver is even starting to join the party too. By the way, did you catch any of the rallies in the energy space over the past few weeks? I have to be honest with you, the majority of stock purchases I’ve made recently have been in precious metal miners and in shares of energy companies.
So, this is why I think something has broken in markets.
The inflation trade is making a comeback, and this is going to have serious consequences for the overall market. For example, if we go back to the start of Q4 2023, tech is not even the top-performing sector anymore. Does that sound like a healthy stock market to you? Of course, this doesn’t mean that there won’t be opportunities to profit in this market. But it’s all about being in the right place at the right time. Every market cycle serves its purpose, and we’re about to be starting a new one.
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