Wednesday's Market Minute: Goldilocks Is Looking Like A Fairy Tale

For investors, the most important thing about 2023 has been how different it is from 2022. That is, until two weeks ago.

Last year’s bear market was defined by the positive correlation between stock and bond prices; the inverse relationship between Treasury yields and equity indexes. That ended last October when stocks bottomed at the same time yields topped out. Stocks and bonds spent much of the next 6 months rallying in unison. Then, at the end of this first quarter, yields started rising again, and stocks were OK with it.

This harmony with bonds is the single all-encompassing reason why stocks have been so strong the past 10 months. Disinflation/soft landing/Fed path – all these are parts of the simple whole truth that the bond market stopped making problems for the stock market, people noticed, and have been comfortable buying again. 

That cease-fire between stocks and bonds ended two Thursdays ago, the 27th of July. The S&P 500 hit its year-to-date high that morning, right before a bunch of economic data, including GDP, came in hot. Yields spiked, and the S&P 500 peaked. 

The Nasdaq had been struggling before that, hitting its own peak prior to Netflix (NFLX) and Tesla (TSLA) earnings. But that’s just a different version of the same story. Valuations in tech are coming under pressure at levels far below their Covid peak because investors are not extending the same generosity when the Fed funds rate is 500 basis points higher.

Earnings are too weak for rates this high. Inflation’s too hot and profits too cool. Goldilocks is indeed looking like a fairy tale, and bears are on the prowl.

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