Did We Just Get a (Marginal) New All-time S&P High?

Why yes we did. Having failed three times over the past year, always falling just short, Brexit finally pushed the S&Ps over the top to new highs on both an intraday and closing basis on Friday (July 8, 2016).

How did Brexit, which so many thought was the end of the world as we know it, accomplish this little miracle? It brought the central banks out to play with us once again, with their promises of lower for longer and yet more stimulus if needed. With that as the backdrop and a shiny new U.S. jobs number on Friday, the combination of cheap liquidity forever and a positive economic report took the speculators out of their chairs so they could reach for their wallets one more time.

In the old days, the advice would have been to buy the break-out. Not this time, dear reader. This move does not have the gusto that should be bought. In fact, it reminds me of the market top in the third quarter of 2007, just before the bottom fell out. Then, as now, the economic news had been turning down and the markets were artificially buoyed by expectations of Fed easing.

If the economy is about to turn up, as some think, and the earnings recession is ending (four straight quarters of falling profits), why are Treasury bonds outperforming stocks? Why has the yield on the 30-year bond, the ultimate refuge from recession and equity risk, just set a new all-time low?

Please study the following 15 year chart of the ratio of the S&Ps to the 30-year U.S. Treasury Bond. After the ratio hit a peak in favour of stocks in the third quarter of 2007, bonds took over and outperformed as investors became more risk averse and the stock market crashed. This chart suggests that the real peak in stocks this time around happened in 2014, not last Friday. To me, stocks topped out in 2014 just as they did in 2007. If Friday is the beginning of a new up leg in stocks, somebody better tell the bonds. They seem to think we are headed back to 2008. I agree with them.

If it’s taking a little longer for stocks to accelerate downward this time around, it’s because of the amount of money the central banks have pumped into the system to keep markets afloat. It’s not because investors like bonds for their yields.