How the bonds market can be indicators for equity markets
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I wrote last week that inflation fears could delay the recovery from the latest COVID variant dip. Friday’s equity market action made it clear that investors have accepted supply chain inflation, even if Americans are personally frustrated by rising prices. Even small and midcaps were up on Friday though less so compared to large caps.
As we predicted the latest COVID related downturn was FAST and the recovery was even FASTER, making last year’s 3 month recovery look glacial. It took just seven trading sessions for the S&P 500 to reach yet another all time high on Dec 10th.
While the large cap S&P 500 made an all time high on Friday, there is still a clear preference for the mega cap growth stocks. Information Technology led the rally the entire week. Value and Small caps were all up for the week but lagged to favored mega caps.
November’s CPI increased 6.8% versus the prior year. Probably not a surprise for most Americans, especially those in the midst of holiday shopping. The bond market’s reaction was surprising as the yield on the US 2 year T-bill declined to .64% and the US 10 year note yield declined to 1.48%. Despite Friday’s decline, he 2-year yield has been on a sharp increase for 3 months, indicating investors are increasingly confident about Federal Reserve rate hikes in 2022. The 10-year treasury has a very different pattern. The volatility and sideways trend in the 10-year yield indicates there’s still some de-risking as investors allocate more heavily into intermediate treasuries, pushing up prices, and moving yields down. There is some investor concern around equity risks but not enough to stop the increase.
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