10-Year Yield Decline to 3.9%: Risk for Treasury Bonds
Investing Environment Review and Outlook – Volume 78
- 10-Year Yield Decline: Risk for Treasury Bonds
- Equity Investor Positioning Long
- Presidential Seasonality Turning Negative
- Crude Oil Positioning Extreme: Bullish
Last month we discussed the Q4 equity rally, the bullish Zweig Breadth Thrust and the turn in the 10-Year yield. Since then, the S&P 500 rallied further, and the 10-year Treasury bond yield continued its decline from the October peak. This month we discuss the implications for Treasury bond yields and the change in the presidential cycle seasonality. U.S. equities, foreign-developed and emerging markets equities remain bullish 5 ratings. Gold remains a bullish 5 rating and industrial commodities remain a bullish 4 rating. We cut long-term bonds to a bearish 2 rating.
10-Year Yield Decline to 3.9%: Risk for Treasury Bonds
At the 12/13 FOMC meeting, Fed Chair Jay Powell initiated the “Fed Pivot” by stating we are likely at or near a peak in rates for this cycle. This further extended an already extreme move in the 10-year Treasury yield from 5% in October to 3.9% on 12/22. At 3.9% the 10-year yield is low by historical standards, down to the 35th percentile of rates since 1950 and just 0.8% above the CPI inflation rate. However, the norm since 2008 of just 2.2% during the Fed QE period has resulted in extreme investor positioning in bonds as many investors believe rates are still high, despite the Fed regime shift in 2022 away from QE. According to the December BofA monthly survey, surprisingly more investors believe the 10-year yield will fall today than at the height of COVID in March 2020 or the Global Financial Crisis in November 2008 when economic conditions were extremely weak.
Finally, economic outlook indicators like base metals and even equity indices (S&P up 16% since October) are higher. Historically, such moves were followed by higher yields, particularly after such an extreme rate decline since October that is not justified by economic weakness. As a result, we are cutting our bond rating to a bearish 2.
Equity Investor Positioning Long
The 16% S&P 500 rally since October 27th resulted in an expected reversal in investor positioning from the widespread pessimism in October. As of 12/20/23, 7 of 8 investor groups were above their norm and 5 of those were extreme. Despite the 14 month rally from the October 2022 low, institutions remain neutral, offering room for positioning to extend further to the upside before it becomes a significant negative for markets.
Crude Oil Positioning Extreme: Bullish
After the sharp crude oil decline to $70 from $90 in September, crude oil positioning is extremely low. In prior cases, low points in sentiment like this marked turning points in crude oil. In addition to positioning, seasonality is positive for crude, the economic outlook has improved to neutral and the dollar has reversed lower.
S&P 500 Weak in Q1 of Year 4
January marks the beginning of the last year of the presidential cycle. Since 1950, Q1 of year 4 was among the 3 worst quarters of the whole cycle, averaging just a 1.0% return. The worst cases included 2020 (-19.6%) and 2008 (-9.4%), however these were offset with the two best in 1976 (15.0%) and 2012 (12.6%). In Q1 just 61% of the cases were higher, compared to 89% of the years higher in Q4 of year 3.
This month we discussed the likely reversal in the 10-year yield after such a strong consensus move lower, the bullish positioning in equities and the bearish positioning in crude oil. Although the S&P 500 is overbought in the short term and we expect higher volatility in January, fundamental conditions like declining inflation, declining rates and the improving economic outlook were followed by further upside in equities historically. The Zweig Breadth Thrust also remains bullish. Finally, the weak dollar is bullish for foreign equities and commodities like crude, copper and gold. We will continue to watch our indicators on a daily basis and shift exposure targets as appropriate. Thank you for your support and please contact us with any questions.
This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2023
Director of Market Research
Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…READ MORE