My previous market comment was titled “Finally, Some Volatility & a Buying Opportunity” and it seems that we are getting it. Although the stock market may still have some more room to move lower, this is not the beginning of a long term downtrend or bear market. On the positive side, both earnings and sales growth are topping expectations, while on the negative side, the behavior of the bond market indicates that inflation expectations may be growing. Only a few weeks ago investors were concerned about the flattening of the yield curve, which is perceived as a negative for the economy. Clearly, the yield of the 2 year, 5 year, 10 year and 30 year Treasury are now pointing in the opposite direction: the yield curve is steepening and the U.S. economy is healthy and growing.
The risk of bond yields rising is that at a given and most likely higher yield, money will rotate out of stocks and into bonds, chasing a fixed yield instead of the volatility of the stock market. That doesn’t mean that the uptrend in stocks is over, but the perception of higher inflation may be enough to slow down the market’s advance, creating pockets of higher volatility during the year.
While volatility moves up, stocks move down. That is exactly what happened during the last few days, as we saw the CBOE Volatility Index (VIX) surging to the highest level since late 2016. Perhaps the record lows in bond yields and volatility are coming to an end. In the meantime, although the short term trend of the S&P500 is under pressure, to say the least, the mid to long term trends are in bull mode. We are sticking to our proprietary analytical process, which has kept us always on the right side of the market since the internet bubble, to determine what to do next.