Treasury Rates vs the S&P 500

On very light volume, the S&P500 ended last week virtually unchanged from the week before. Volume was light mainly because of the calendar—peak summer vacation season. And S&P volatility also barely changed; but that’s probably more a function of the fact that the VIX index was already at the lows of the year and had very little room to fall further.

With the lack of movement in the S&P last week, the technical picture remains unchanged—the S&P500 is extremely overbought. On both the daily and weekly charts, the S&P is pushing the upper limits of many commonly followed indicators. Any sort of pullback, from these lofty levels, would be very normal and almost expected.

As far as economic news goes, last week as a big disappointment. Productivity was a total disaster; instead of rising as expected, it fell. And the continued deterioration in labor productivity is important because it will directly impact future corporate earnings….negatively. Initial jobless claims, while still very low, came in a bit higher than expected. Import prices rose instead of falling as predicted; this too will hurt corporate profits. Retail sales were a disaster—both headline and core (excluding autos) sales missed badly. And consumer sentiment also missed. Only wholesale trade and business inventories beat expectations…..and even then, only slightly.

Finally, another major divergence has developed between US Treasury rates and the S&P500. While the S&P ended the week just about at all-time record highs, the US 10 year rate finished the week with a 1.5% yield. And since the 10 year yields (as opposed to 10 year prices) usually move together with the prices on the S&P, this sets up a massive problem—the super low yields on the 10 year suggest that the prices on the S&P500 ought to be much lower. Of course, some would argue that the US Treasury market is wrong and that those yields ought to rise in order to “converge” with the all-time high prices in US equities. But one has to remember that “mom and pop” investors (ie. unsophisticated investors) do not participate in bond market trading nearly to the extent that they do in stock market trading. in other words, the dumb money is far more commonly found in stocks, not bonds. And if that’s the case, then these super low Treasury yields are suggesting that the stock market investors…..sitting on all time high prices…..are super wrong.


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