Want To Know Where Stocks Are Headed? Follow The Bonds.

Bond markets lead financial markets. The yield spread (difference) between 2 year government bonds and 30 year government bonds and the direction it is moving in are key to the flow of money in the bond market:

The gold line is the spread differential. As 2 year yields rise (because the central bank is raising rates) and 30 year yields rise less, the gold line moves from upper left to lower right on the chart. That is because bond investors are less worried about long-term inflation and move money into longer dated bond investments. Quite simply, they are less concerned about inflation because the higher short-term yields are expected to slow economic growth and lower the potential for inflation.

Recessions (the blue shaded areas) occur, historically, after the yield spread hits zero or goes negative. We call this a flat yield curve (at zero) or inverted (when spreads are negative).

The US yield curve has flattened from a 4.00% spread in 2011 to close to its lowest level since at about 0.80% now.

The US Federal Reserve is expected to raise rates by another 1/2 to 3/4% this year. That should just about flatten the yield curve to zero.

Stock markets don't like recessions. It has taken a bit of time, but it appears that, given all the volatility happening now,  some of the smarter stock market participants are starting to get the hint.

S&P 500 In gold, recessions in blue. Yikes! I am afraid of heights!

In Canada, after Statistics Canada announced inflation for the year Mar. 2017 to Feb. 2018 had jumped to 2.2% (mostly as a result of increased gas prices, again), the bond yield curve moved to its lowest point since 2010, a little less than 1/2% from a flat yield curve. Probably one more quarter point increase from the Bank of Canada.

I read a blog the other day where the advice giver was urging her clients to remain calm.

If stocks retreat just 20%, a fully invested portfolio of 60% equity and 40% fixed income is going to give up 12% in the equity portion.

I'd rather be more tactical about it myself (being less exposed to equities with some buying power when markets hit their lows), a little less painful and a lot more calming, to say nothing of getting more invested with better value.

That is the way we like to invest our personal portfolio's and we sleep well at night. We started High Rock's Private Client Division to offer the same to those who wished a better alternative (than just waiting it out).

Meanwhile, keep an eye on the bond spreads.