Stocks and Bonds Continue to Search for Direction: Market Commentary from Cabana’s CEO – July 22, 2022

1 year ago

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Apologies for the pause in commentary over the past week. I have been on vacation in Colorado with my family. We will pick up our weekly commentary as usual next week.  

Since my last remarks, we got the June CPI (inflation) numbers and they came in hotter than expected. We are now seeing inflation rising at the fastest levels since 1981. This of course has been the worry since the beginning of the year and is the reason for the simultaneous bear market in stocks and bonds that we find ourselves mired in.  

I read an article earlier this week that stated we have just experienced the worst first half of a year in stocks and bonds in history. I haven’t confirmed that claim but can state it is by far the worst I have ever seen. It is no surprise that we periodically get a bear market in stocks, but the concurrent selloff in bonds and other fixed income that we have seen is unprecedented. All of this is tied to inflation and rising interest rates. The continued surge in core inflation reinforces the Federal Reserve’s hawkish position and the near certainty that we will see another 75 basis point hike at their meeting at the end of the month. We may even get a full 1% hike, which would be extraordinary to say the least. These rising rates and inflationary pressures create major headwinds on all growth assets (and temporarily on bonds as well). The current situation is causing a lot of large investors to acknowledge that a recession is now likely, if not imminent. As further evidence of this, the yield curve has now inverted, and the 2-year Treasury bond is paying more than the 10-year Treasury bond. This is not normal and suggests that a significant economic slowdown is on the way. To drive this point home a little more, the current spread inversion is the greatest since the early 2000s… and everybody knows what happened between 2000-2010 (two protracted and steep bear markets). The drop in bond yields (especially the 10-year Treasury) this week is good for the short term and helps risk assets, but longer term….? Suffice to say, markets are in a very precarious position, and it does not appear we are anywhere near out of the woods yet.  

All in all, we continue to see stocks and bonds search for direction, and volatility is likely to continue throughout the summer. It does not surprise me that we are now seeing an attempt at a sustained rally in stocks. It will be important to see if the S&P 500 can close the week above its 50-day moving average. That important technical level has not been achieved since April and could lead to a rally lasting into the early fall. It is around that time that we may begin to see the practical impacts of the interest rate increases on the consumer and small businesses. If smart money sees it first (i.e., the bond market) and the yield curve inversion is right, we may then get to see another leg down in stocks before this bear market is over. 


June 22, 2022

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