On The Threshold Of Bond Market History

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With 10 basis points left to make bond market history, the 10-year Treasury yield closed on Friday a tad over 3.142%. In the past 40 years, no Fed rate hiking cycle saw the 10-year rate exceed the high from the prior Fed rate-hiking cycle. The high from 2018, the last time the Fed seriously raised rates, was 3.248%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In theory, bond yields can have a false breakout and still resume their downtrend – kind of like they did in the summer of 2007 by breaking the long-term trendline for a week or two – but the fact remains that we are flirting with ending the long bull market in bonds that started when the Fed Chairman of the time, Paul Volcker, broke the back of inflation by creating a deep double-dip recession in the early 1980s.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

While inflation is not as bad as it was in the late 1970, the CPI numbers are the highest in 40 years. The next Consumer Price Index (CPI) is due Wednesday, with the Producer Price Index (PPI) due Thursday. The CPI may show improvement on multiple fronts due to base effects – comparing high CPI readings from last year to high CPI readings this year, reflecting a smaller rate of change – so both bonds and stocks may find reasons to celebrate. That would depend, of course, on how big the improvement is.

Because of the high amount of leverage in the system, it will not take as many Fed rate hikes to slow the economy down as it did 40 years ago. I am not sure the Fed can take the Fed funds rate to over 2.5% in 2022, but the futures markets sure are pricing it in, and the Fed Chairman himself sounded confident that he can deliver as many rate hikes as needed at the FOMC press conference last week.

We Are Due for a Stock Market Rebound

If the inflation numbers show improvement and the war in Ukraine does not escalate, sending oil prices and other commodities parabolic, I think the chances for a stock market rebound are significant, notably in the Nasdaq 100, home to many tech heavyweights that have been under pressure in 2022. Over the past week the index flipped but ended only marginally down. We are below the March lows but not by a lot.

The VXN is the same kind of index as the VIX, but for the Nasdaq 100. While the VIX measures implied volatility on S&P 500 index options, the VXN measures it for the Nasdaq 100. It is at an elevated level, but it refuses to make further upside moves, the same way the NDX index is not making further downside progress. This is how volatility indexes act before they decline, while the stock market rebounds.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What would be a good target for an NDX rebound? The 200-day moving average is near 15,000. The average is now declining and should serve as a pretty good resistance level, but it is also 2,500 points above Friday’s intraday lows on the NDX, which would be a huge move to the upside.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I think the stock market was worried about the Federal Reserve over-tightening and inflation getting out of control, but what if we get good news on both fronts – if the Fed avoids 75 bp rate hikes for the next several meetings, as Powell noted in his press conference, and inflation peaks, at least for the time being?

As expected, the stock market is performing so far this year very much like it did in 2018, with lots of ups and downs (see my column in Navellier’s Marketmail last October: “Get Ready For 2018-Type Volatility In Stocks And Bonds”). April was a big down month. I see several reasons for May to be up.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.

Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.

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