There was a time when the world made a bit more sense in that as treasury yields rose, stocks would be pressured for the simple reason that higher bond market yields would be send money chasing after the higher yield.
As the chart shows, the inverse correlation worked quite well in understanding the declines in the stock market up to the mid part of 2006 when the Fed put the breaks on rate increases, treasury prices rallied (yields declined) and stocks took off. This year, however, rises in bond market yields have not elicited the traditional response from stocks. The SnP is getting close to hitting the high of the year, yet the 10 year treasury yield on Friday crossed above its 200 day moving average.
I just love what's happening here - deja vu all over again. The stock market had rallied earlier in the year in the face of rising bond yields, only to be slapped down in late February, and here again the stock market is moving higher even as bond yields move higher again. This is as if the bulls are saying, "May I have Another One Please, Sir!" I just can't see this ending well for the Wall Street bulls in the months ahead if the message of "flation" that bond yields are telegraphing is confirmed. This sure doesn't look like an economic prosperity rally in treasury yields. Why? Just look at the dollar which is telegraphing the "Stag" part of stag-flation.
As I noted on Friday, someone found the lost "buy gold in the face of a falling dollar memo". Gold is now perched at just below $690. If the Dollar Index rapidly tests 80 and or gets around more slowly to breaking 80, it wouldn't be a surprise to see gold rapidly bust above $700 and take the rest of the metals and most commodities with it which will only enhance the stag-flation worries and jolt the stock market. "Jolt" just isn't in the thinking of many folks and I don't think many are paying enough attention to the dollar and bonds and the coming reprecussions of a dollar index at 80, or a surge in 10 year bond yields if the Fed thinks its trapped and can't lower rates amid rising prices.
While the stock market may be able to move higher, dragged up by strong world liquidity, including strong overseas markets (just look up a chart of the EFA), stag-flation and its causes just can't be a good situation for stocks over the medium term. The rotation into, and performance of groups like energy and healthcare has been noticeably strong while financials, even techs have underperformed. Are you in the winners, or the losers?
In the week ahead, hundreds of companies will be posting earnings. The more notable names:
Monday 4/16: C, ETN, LLY, MAT, GWW and WB. Tuesday 4/17: MEL, WFC, CSX, EMC, INTC, IBM, USB, YHOO, WM. Wednesday 4/18: ABT, ALL, BK, CBH, EFTC, EBAY, GILD, JPM, KFT, MOT, NVLS, TRB and UTX. Thursday 4/19: AMD, BAC, MO, AXP, ASD, BAX, COF, DHI, GCI, GOOG, HOG, MRK, MAR, MER, SGP, LUV, STJ, NYT, UNH, UNP and UNH, WYE. Friday 4/20: CAT, HON, MCD, SLB and XRX.
On that laundry list, if memory serves me correctly, two (MRK and MCD) have pre-announced stronger than expected numbers while MOT pre-announced a train wreck.
Given overall lowered earnings expectations, numbers interpreted as decent could propel the market to greater heights even if a day of stag-flation, or dislocation reckoning is on the way.Oh, and quick note about the VIX: beware of folks who downplay the present levels.. in this 12 area. The VIX IS priced way too low vs the negatives listed in this post. The complacency is almost deafening. Folks comfortable with VIX at this level don't understand it to begin with and need to explore the meaning of looking at it relative to where it should be, or that at times it has been way too cheap, other times too expensivive. This is the time to recognize that it's too cheap.