US Treasuries Diverging from US Stocks

The S&P500 continued to march higher last week. The index moved up almost 0.7% by Friday’s closed. Of course, there was no real enthusiasm on the part of investors because volume fell to one of the lowest levels of the year, so far. Also not confirming the rise in stock prices was the stock market volatility which barely budged; normally the VIX would fall when stock prices rise.

In US macroeconomic news, the results were mixed. On the positive side, existing home sales and consumer sentiment both beat expectations. On the negative side, PMI manufacturing, the Chicago Fed National Activity Index, and new home sales all missed expectations. Initial jobless claims and the FHFA House Price Index both met expectations. So once again, the US economy is not showing any signs of entering any period of robust growth.

If technical analysis suggested that the S&P500 was stretched to the upside the prior week, last week’s additional increase in prices means that the index is even more stretched now. Anyone who puts more or new money to work in this type of market is simply betting that overstretched prices will become even more overstretched in the near future. Clearly, the S&P’s performance over the last several years suggests that this is entirely possible, even in the face of stagnant corporate sales and declining corporate earnings.

Finally, the US Treasury market has begun diverging from the US stock market over the last several weeks. Normally, when stock prices rise, the prices of US Treasuries fall (ie. yields go up).  And this is exactly what’s been going on for most of the period since the S&P took off after the election of Donald Trump. But lately, especially over the last few weeks, the reverse has happened—as stock prices continued to climb, UST yields have started to drop, and by meaningful amounts. In other words, UST prices (and yields) are diverging—negatively—from US stock prices. While this doesn’t mean that stock prices are bound to drop because of this reason alone, it is something that’s important to watch….especially because the size of the US Treasury market is so huge and because it has a good track record of reflecting the views of smarter, more sophisticated institutional investment money.

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