MARKETPLACE RELATIONSHIPS: LIFE DURING WARTIME © Leo Haviland March 7, 2022
In Mario Vargas Llosa’s novel “The War of the End of the World” (Part III, chapter II), the Baron de Canabrava declares: “‘The times are out of joint…Even the most intelligent people are unable to make their way through the jungle we’re living in.’”
CONCLUSION AND OVERVIEW
Russia’s invasion of Ukraine halted, but did not end, the major trend for rising yields in the United States Treasury marketplace which commenced in March 2020 and accelerated in early August 2021. Despite this “flight to quality” (safe haven) pause, the long run pattern for increasing UST rates eventually will resume. Substantial inflation in America and the OECD relative to recent interest rate levels as well as globally high government (and other) debt levels will propel UST rates upward. Previous essays pointed not only to rising rates for high-quality government debt outside of the United States, as in Germany. A pattern of higher yields in the United States corporate sector as well as in lower quality emerging marketplace sovereign debt appeared. Thus a long run rising yield environment is an international phenomenon.
Convergence and divergence (lead/lag) patterns between marketplaces can change or transform, sometimes dramatically. Marketplace history does not necessarily repeat itself, either entirely or even partly. Marketplace history nevertheless provides guidance regarding the probabilities of future relationships.
“History on Stage: Marketplace Scenes” (8/9/17) and subsequent essays updating it (such as 3/9/21’s “Truth and Consequences: Rising American Interest Rates”, “Financial Marketplaces: Convergence and Divergence Stories” (4/6/21), “American Inflation and Interest Rates: Painting Pictures” (5/4/21), and “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) emphasized: “Marketplace history need not repeat itself, either entirely or even partly. Yet many times over the past century, significantly increasing United States interest rates have preceded a noteworthy peak in key stock marketplace benchmarks such as the Dow Jones Industrial Average and S+P 500. The yield climb sometimes has occurred over a rather extended time span, and the arithmetical (basis point) change has not always been large.” The US Treasury marketplace has been an important standard for this analysis. The 10 year UST note is a key benchmark.
What about trends for the S+P 500 and other advanced nation stock battlegrounds? Quite some time prior to Russia’s 2/24/22 attack on Ukraine, rising interest rates and tumbling emerging equity marketplaces warned that the S+P 500 probably would fall significantly. “Emerging Marketplaces, Unveiling Dangers” (12/2/21) concluded that “the S+P 500 probably has established a notable top or soon will do so”. “Paradise Lost: the Departure of Low Interest Rates” (2/9/22) stated: “The S+P 500’s stellar high, 1/4/22’s 4819, probably was a major peak; if its future price surpasses that celestial height, it probably will not do so by much.” “The S+P 500 price probably will decline further and establish new lows beneath the January 2022 trough. The development of a bear trend (decline of at least 20 percent) also is probable.”
Significantly, the S+P 500’s 1/4/22 high at 4819 and its initial 12.4 percent correction to 1/24/22’s 4223 preceded Russia’s late February 2022 invasion by several weeks. Thus that attack did not initiate significant S+P 500 weakness. In addition to the rising yields (increasing inflation; as well as lofty debt levels and outlook) and feeble emerging stock marketplaces, arguably high valuations from the historic perspective for the S+P 500 also existed prior to the Russia/Ukraine war. The strong United States dollar prior to the attack also pointed to stock marketplace weakness. The US dollar remains robust. The vicious bull spike in petroleum, wheat, and many other commodities since the invasion further undermines the S+P 500 and related stock domains. Looking forward, the S+P 500 probably will continue to retreat.
As “Paradise Lost” stated, the UST 10 year note yield probably will climb to at least the 2.50 to 3.00 percent range, with a substantial likelihood of achieving a considerably higher summit. The Federal Reserve and other heroic central banking generals probably will not deploy substantial actions to rescue the S+P 500 unless it tumbles around twenty percent or more from a prior pinnacle.
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Marketplace Relationships- Life During Wartime (3-7-22)