By John Del Vecchio and Brad Lamensdorf
Rarely do we see anything new in financial markets.
While markets evolve, human nature does not. The same extremes occur over and over again.
Those extremes are driven by fear and greed.
Fear and greed are powerful emotions that cloud our better judgment.
However, there is something new that has developed in 2023. Check out this chart.
Corporate bonds are yielding less than the Fed Funds Rate.
About 7.5 basis points, to be exact.
That tells us we live in a Bizzaro Superman world where everything is upside down, and nothing makes sense.
Why would you earn less to take more risk than a risk-free short-term rate?
It’s unprecedented.
While the recent run-up in stocks in 2023 could have signaled the end of the bear market, we are doubtful because of this chart.
Markets do not bottom when spreads are this tight.
Markets bottom after spreads have blown out.
Spreads are far from having blown out. Take a look at this chart below.
The chart shows the forward earnings yield on the S&P 500 minus the 10-year Treasury Yield.
We are right back to where we were in 2008.
We all know how that horror movie ended.
Lots of blood and guts.
Also, 2011 had a significant market scare, and this relationship was signaling trouble about six months ahead of time.
Right now, you’re taking a lot of relative risks owning aggressive risk assets.
It might work out, or…
It’s time to tighten stops and add to hedges.
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Originally Posted February 21, 2023 – Unprecedented
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