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This report includes:
- Make bonds great again.
- Stock market forecast.
- Is stock market reflexivity returning?
- A lifetime opportunity for significant profits?
- Reasons for the yen intervention.
Weekly Summary (April 29–May 3, 2024)
- Stocks rebounded after a dovish Fed and earnings surprises.
- As the odds of a rate cut in September increased, bond yields fell.
- Commodities were lower, and the US dollar index fell for the week.
The DBC ETF dropped 2.3% due to a sell-off in crude oil and precious metals. The price of spot crude oil plunged 6.7%, and gold (GLD) fell 1.7%. For the week, the U.S. dollar index (UUP) was down 0.8. Gold (GLD) has outperformed the SPY ETF since 2022 by a wide margin, with a return of 24.6% versus 11.4%, respectively.
The rebound in large-cap stocks (SPY) continued with a gain of 0.6% for the week due to a dovish Fed and better-than-expected earnings. Tech stocks (QQQ) gained 1%. Small caps (IWM) were up 1.8% but are still down 13.8% from their all-time highs despite a rally in the last two weeks. The high beta large caps (SPHB) fell 0.6%, while the low-volatility large caps (SPLV) rose 0.2%. The Dow Jones Industrial Average (DIA) ended the week up 1.2%.
For the week, the magnificent 7 equal-weight index gained 2.9%.
AAPL surged 8.3% after announcing stock buybacks, but the stock is still 4.6% down year-to-date. TSLA jumped 7.7% after announcing layoffs. This stock is 55.8% down from the all-time highs of November 2021. META gained 2% and is now 14.3% below all-time highs. Year-to-date, the stock market has found dynamic support from AMZN, GOOGL, and META, but primarily from NVDA. The performance of MSFT has been average, and AAPL and TSLA have had a negative impact. Last week, I wrote:
With a large number of mega-caps, the odds of the stock market finding support because one of them outperforms are always high. This dynamic will remain in place until there is a severe deterioration in the fundamentals or an unexpected tail-risk event.
Investors, primarily index fund investors, hope that one or more of these mega-caps will always provide support to the market due to a good story, and there seem to be unlimited possibilities in that direction, including but not limited to earnings, buyouts, layoffs, new product announcements, and so on. Therefore, the big losers in this stock market are those who short it, while there is no discernible trigger for a sell-off but only typical volatility. However, when the appropriate trigger occurs, there will be a significant correction, as discussed further below.
The TLT ETF gained 2.2%, but it is still down 7.9% year-to-date. Since January 3, 2022, the TLT ETF has been down 34.9%, while large-caps (SPY) have gained 11.4%.
The utilities sector (XLU) gained the most, 3.4%, on expectations of rate cuts in September due to a dovish Fed. Year-to-date, the energy sector (XLE) is up the most, by 11.3%.
The real estate sector (XLRE) is down the most year-to-date, by 7%.
Make bonds great again
The S&P US Treasury 20+ Year Total Return Index, after a multi-decade uptrend, is down 42.6% from the all-time highs of 2020 due to rising inflation and interest rates.
Bonds have not been a good investment for the last four years and have not provided diversification benefits to strategic investors. This has caused a frantic search for alternatives, including managed futures and new complex products that attempt to make efficient capital allocations to capital markets through leverage.
None of these “new” approaches guarantee the same diversification benefits and robustness that investors enjoyed for many decades before the bond market rout started in 2020. Wishful thinking and, frequently, risky data mining exercises are what drive them most of the time, with the objective of benefiting from fees on new product offerings.
The question is, what will it take to make bonds great again? What will the consequences be? We believe these are the important questions from a fundamentals perspective, rather than narrative creations due to noise in economic releases. We provide answers to these important questions below.
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Specific disclaimer: This report includes charts that may reference price levels. If market conditions change the price levels or any analysis based on them, we may not update the charts. All charts in this report are for informational purposes only. See the disclaimer for more information.
Disclaimer: No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.
Charting and backtesting program: Amibroker. Data provider: Norgate Data
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