Well, that clinches it. The U.S. markets' deep-in-the-red opening Friday after the release of a very strong employment report form the Bureau of Labor Statistics confirms the feelings I have had for the past two weeks.
We are in a bear market now.
Long-time market watchers will know that bear markets are susceptible to "bear market bounces" and in fact we have had two of those this week. But not Friday.
My job is to poke holes in data. But I simply cannot see anything concerning in the U.S. non-farm payrolls data for February. Yet the markets are down across the board as of this writing.
So, sentiment on U.S. stocks has changed, and you need to plan accordingly in your portfolio.
This is not the time for defensive stocks, it is the time for rotation into "non-stocks." The yield on the 10-year U.S. Treasury Note is 0.707%, and the 3-month UST is yielding an astounding 0.42%, well below the current fed funds target range of 1.00% to 1.25%.
I have used this phrase so many times, but I will say it again: bonds still look good here. The ridiculous capital gains being accumulated by bond market investors are just the product of being in the right place at the right time. The U.S. government can print money. There is zero risk of default on Treasuries. Remember that.
But positive sentiment leads to excess. I was screaming that from the rooftops three weeks ago as the S&P 500 crossed 3,300 and all major valuation metrics -- price sales/price cash flow price/earnings -- for that broader-based index were trading at 18-year highs.
So, if the stock market trading at cycle-high valuations was showing characteristics of a bubble, then why is the bond market, with yields across the curve at ALL-TIME lows, not flashing the same signals?
As noted above, the U.S government can print money.
That money printing is amplified when much of it is what used to be self-issued bonds. The New York Fed owns more than $2.0 trillion in Treasuries, including a majority of the outstanding amount of many of the higher-coupon issues. That is a source of funds that even the most well-capitalized private companies can only dream of.
But Treasures are used as a benchmark to price virtually every other fixed-income instrument just as other government-issued bonds are in other geographies. If you look at a chart of world yields, only the U.K. 10-year government bonds (known as gilts) sport yields above zero, and if this move continues they could be negative by the end of next week. So, of course, it could happen here.
In August, Germany sold E824 million of government bonds (known as bunds) that will mature in 50 years, with no coupon payments for that entire time and a maturity value of E795 million. Yes, if you held those bonds to term you would be guaranteed to lose money. Still, the offering was oversubscribed. Even more scarily, according to the Wall Street Journal, European companies, such as Henkel (HENKY) and Sanofi (SNY), and even legacy tobacco maker Philip Morris International (PMI) have all issued negative-yielding bonds.
These are companies, for goodness sake. They cannot print money. Yet investors are lending them money with a guaranteed loss of principal.
What makes that stop? When is this insatiable demand for fixed-income securities -- juiced by artificially low supply since governments are the biggest purchaser of government bonds -- end?
I don't know.
But I do know that until it does, the stock market is going to be under pressure as risk-free securities are generating returns that can normally only be achieved by taking the risk inherent in purchasing equity in a company.
As the Kinks sang in Lola, it's a mixed-up, muddled-up, shook-up world. Obviously, Covid-19 has been the match, but the fire in the bond markets has been brewing steadily for the past 18 months.
Pay attention to it, and you won't get burned.