At the risk of being premature or even wrong I'm going to say that we are in the very beginning of a secular bull market very much akin to the 1980's. And the present price action is eerily similar to the last quarter of 1982, where, after a ferocious bear market, unbelieving Wall Street stood by while stocks rallied in the face of the then worst recession since the Great Depression. What followed was the greatest bull market in financial history.
Now, I have to grant that this time around is different. Demographics played just as much of a role in that incredible bull run as Fed policy or Reaganomics. But I contend that while the magnitude of the present bull may never match that great bull, they may well end up being the same in kind.
For those of you who regularly read my commentaries I want to thank you. I know I'm starting to sound like a broken record but this will yet be another shortened commentary. What started out as a miserable cold last weekend morphed into a full blown bacterial infection that left me bed ridden until today. I'm still recovering.
My format will be different as well so I can present the evidence for a thesis I know few will agree with.
Let's start by looking at stocks. Here's the S&P 400 Mid Cap Index which continues to push into new all time historic highs:
Let's look at Treasuries. As per our inter market relationships we should be seeing commensurate weakness in the Treasury market as stocks move higher. Here's a daily chart of the Ten Year US Treasury Note yield with the S&P 500 transposed behind it:
As a brief primer, as bond prices weaken yields move higher. Yields therefore, are positively correlated with stock prices.
If you study the chart closely, yields and stock prices track pretty closely with any divergences eventually correcting themselves. I had been concerned about the most recent divergence as yields had been dropping in the past two weeks but Thursday and Friday's action in the Treasury market finally corrected that short term divergence.
The length and strength of this present "bull leg" will largely be determined by the magnitude of the acceleration of investor money out of the safe haven of Treasuries and into equities. With Treasuries yielding negative real interest rates investors are losing money sitting in Uncle Sam's debt. With potential global Armageddon scenarios presently extinguished there is no reason for the trillions of dollars in Treasuries to remain there.
Expect the migration of monies from bonds to stocks to progress slowly at first as scared investors, having been conditioned to four years of historic radical volatility, at first dip their feet into the water and then wade in up to their waist and then finally take the plunge into stocks.
The Fed's job during this transition will be to insure price stability in the Treasury market, especially if bond redemptions take off. Obviously, the explanation behind this scenario is much more complex and how the Fed handles this great "unwind" will largely determine inflationary expectations going forward but we will be addressing these issues as they come to the fore in coming months.
Gold is also telling us that this bull market in stocks is real:
NOTHING IN THIS COMMENTARY SHOULD BE CONSTRUED AS AN OFFER OR ADVICE TO BUY OR SELL ANY SECURITIES, OPTIONS, FUTURES OR COMMODITIES. THE OPINIONS ARTICULATED ARE ONLY THIS AUTHOR'S WHO IS NOT A REGISTERED INVESTMENT ADVISOR OR BROKER ... yet!