Friday October 21 ended a week that was quite unusual within the context of normal market dynamics and is quite the talk in cyberspace over this weekend. Over the course of this very difficult year, as bond yields rose (and prices cratered!), the stock market had followed suit. However, we observed quite the opposite last week.
As seen from the chart below, over the course of last week stocks (SPY, the green line) popped +4.7% while long Treasury bonds (TLT, the gold line) sank -5.5%. Interestingly, the long bond ETF traded this way on very high volume, especially on Friday! During this time, core bonds (AGG, the blue line) hung in the middle ground with a modest loss of -0.9% total return.
This kind of conversation is usually reserved for market timers and “technicians”, those market participants who try to discern future market moves based on recent trends. Some view this large sell-off in bonds as a “capitulation” indicator calling a bond “market bottom” and a bullish sign for stocks. Others thought it was simply the Bank of Japan selling Treasuries to buy yen to support the yen, likewise a bullish sign for stocks. Still others call this a “bear steepening” where long rates go higher faster than short rates indicating higher inflation but early signs of an economic recovery. Interestingly, most market commentators are calling this a “bullish” sign for stocks.
Of course, we are all very good at telling a story about what happened in the market, but not too good at getting the reason right, and especially not too good at predicting the future outcomes! As I have relayed all year, history has proven that long term investors in a diversified portfolio of high-quality risk-managed investments will be rewarded over time.