My Name Is Bond, Treasury Bond!
Thomas Johannes Look
Capital Management (up 37,12% full year 2023, up 72,73% in 2024, as of 14 December), Corporate Advisory & Digital Publishing
Trump vs. Bond - The Real Battle Ahead
Salve, cari subscripti! Thank you for reading this week's edition of Closelook@Hypergrowth, dated November 14, 2024 👋. The next edition will be published on 20 November 2024.
A Closelook At This Edition
(1) This Week's Action: Trump Winners and Losers
Stocks have been on a tear since Donald Trump claimed victory in the United States election last week. The S&P 500 posted its best week in a year, gaining 4.7 percent and crossing the symbolic threshold of 6,000 for the first time.
The Nasdaq and the Nasdaq 100 finally made new ATHs, breaking above the summer 2024 highs.
The best-performing Nasdaq 100 stock in the past month has been Tesla - up more than 50 percent. Animal spirits have returned.
The table below shows the Nasdaq 100 one-month individual stocks performance ranking.
Quite a few semiconductor stocks are at the bottom of the table, while software has finally outperformed the hardware/infrastructure-related AI sectors.
Super Micro, Moderna, and PDD have been the worst performers - all for different reasons.
In contrast to the two NASDAQ indices, the performance of the SP 500 Info Tech sector has been more muted (which is a warning signal to me).
I see the sector in the midst of completing wave 9. This may indicate a forthcoming top as the minimum requirements for a 5-leg impulse wave setting with extension have been satisfied.
While we are entering the seasonally best 10 weeks of the year (mid-November until the end of January), I am worried about the bond market's performance.
The 30-year fixed mortgage rate yields have risen to 7.38 % from around 6 percent at the time of the initial Fed cut.
The TTL ETF has cratered. It is trading below 90 USD and heading toward the central support zone around 87.50 USD.
It may well have completed an A-B-C consolidation pattern, followed by (the early stages of) another impulse leg down. In a more bullish scenario, yields should stop rising around the current level and move back to the 100 USD level (see A-B-C-D-E pattern above).
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In a bearish scenario, yields will soon cross the 4.50 percent level and move closer to the 4.75 to 5.00 percent level.
(2) Macro Insights: Sticky Inflation Landing Ahead
Trump vs. Bond - the real battle will not be between the Democratic Party Leaders and Big D; the newly elected president will face a more challenging opponent.
The name is Bond - Treasury Bond! The real battle will be between the bond vigilantes and Donald Trump. And bond vigilantes are tough adversaries. They cannot be scared away by social media, (false) claims, or any other measures from the political campaign playbook. They like to make a deal, lock in a profit and disappear.
Yesterday's CPI report indicated inflation might become sticky above the Fed's 2.0% target. Headline and core CPI inflation rates increased to 2.6% and 3.3% year-over-year in October.
While goods prices continue to deflate, supercore inflation, rent inflation, and wage growth all saw increases last month, suggesting they are stabilizing at relatively high levels.
This, combined with strong economic growth, lends further evidence that the Fed may not ease monetary policy a lot further in the months ahead. This view is further reinforced by rising bond yields, which question the wisdom of the Fed's recent rate cuts.
One and done! One rate cut in 2025 and no more is my preferred scenario.
Ed Yardeni is not concerned about a second wave of inflation, as he believes that increasing productivity is already enhancing real GDP while containing unit labor costs inflation.
Recent upward revisions in productivity support this perspective. However, Yardeni suggests that the Fed may need to allow more time for consumer price inflation to become less sticky before considering additional rate cuts.
Ed Yardeni lifted his SP 500 targets to 6,100 for this year, 7,000 for 2025, and 8,000 for 2026. While I still align with this bullish view, I have raised the probability that we will see a much worse stock market performance in 2025.
One reason is that the bull market will be entering its third year in 2025 - this often marks the end of a bull cycle. The second reason is that while earnings have risen and are projected to continue increasing in 2025, valuations in anticipation of lower interest rates have risen even more.
Multiple expansion has contributed to more than fifty percent of the SP 500 advance in 2024.
This has been based on projecting much lower rates in 2025, as the Fed Dot Plot outlined numerous rate cuts ahead.
Assuming this will not happen, we may see multiple compression in 2025 offsetting any positive effects from rising earnings.
I think it will all depend on the bond market, where we may see the “higher for longer” views re-emerge as soon as December 2024.
(3) Higher For Longer: Initial Macro Forecast For 2025
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