Technical Review, Global Economic Report

Secular Bear Market in Treasury Bonds

Problem for the 60% Stock – 40% Bond Allocation

Consumer Price (CPI) inflation peaked in 1981 and then trended lower for 40 years, and after 1997, Core Consumer inflation held below 2.5%. In April 2021 inflation broke out of this 24 year base with the headline CPI pushing above 4.0% and the Core CPI above 3.0%. The breakout was followed by an inflation surge to 9.1% for the headline CPI and 6.6% for the Core CPI.

The last time there was a comparable breakout was in February 1966, as headline and the Core CPI jumped above the January 1964 highs (2.5% Chart above). After averaging just 1.2% in the 15 years from 1951 through 1965, annual inflation averaged an unthinkable 6.9% in the 16 years from 1966 through 1981, peaking in 1980 at 13.5%. The 10-year Treasury yield broke out above its January 1964 high of 4.25% in September 1965. The breakout in CPI inflation in 1966 and in the 10-year Treasury yield proved noteworthy as the stock market entered a Secular Bear market that would last until 1982.

In response to soaring inflation, the Federal Reserve was forced to increase the funds rate aggressively to bring inflation down, only to cut rates significantly to offset the recessions that followed. The Federal Reserve increased the funds rate from 3.9% in August 1967 to 9.0% in October 1969, which led to a recession in 1970. In January 1972, the funds rate was 3.5% but in July 1974 it topped at 12.9%, only to be slashed after a deep recession took hold in 1974. When CPI inflation began to rise in 1976, the Federal Reserve lifted the funds rate from 4.7% in February 1977 to an unheard of level of 19.1% in January 1981, as Chairman Paul Volker broke inflation.

The 10-year Treasury yield bottomed in 1945 at 2.0% and began a trek higher that didn’t end until 1981. This Secular Bear Market in Treasury bonds lasted 36 years. After inflation peaked in 1981 Treasury yields began a Secular Bull Market. From 1981 until 2020, each low in the 10-year Treasury yield was lower than the prior low and each high was also lower. This pattern defines a trend. In October 2018 the 10-year Treasury topped at 3.248% which was below the prior cyclical high of 5.16% in July 2007.

In June 2022 the 10-year Treasury yield reached 3.483% surpassing the prior cyclical high of 3.248% in October 2018. For the first time since 1981 the 10-year Treasury yield made a higher high. This break out was tested in April 2023 when the 10-year yield fell to 3.25% before climbing to 4.997% in October 2023. In March 2020 the 10-year Treasury yield bottomed at 0.40% so the Secular Bull Market lasted from 1981 to 2020 or 39 years. The breakdown in Treasury bond prices is especially clear on the chart of the 30-year Treasury bond. The upside breakout in the 10-year Treasury yield and breakdown in the price of the 30 year Treasury bond prices suggests that a new Secular Bear Market has begun. Given the length of the last two Secular trends the new Secular Bear Market could endure for 20 to 30 years or longer.

The Federal government, large public companies, and small businesses all benefited from the 1981 – 2020 Secular Bull Market in Treasury bonds. As borrowing costs fell the government and private businesses were able to refinance debt at lower and lower rates, which spurred business investment and economic growth. If a Secular Bear market has begun in Treasury bonds, interest expense will absorb a larger portion of cash flow and result in less business investment and stock buybacks. Stock buybacks soared after the FOMC kept its policy rate below the rate of inflation and implemented Quantitative Easing after the 2008 Financial Crisis. Many large and credit worthy companies borrowed money cheaply in the corporate bond market and then used the proceeds to buy their stock. These purchases reduced the amount of outstanding shares which boosted reported per share earnings. If interest rates stay higher on balance in coming years, issuing debt to buy back shares will be less and likely result in less buy backs. The demand from buy backs represented demand which lifted individual stock prices and the market overall. If the source of that demand is removed, the stock market will lose a prop that has been a big support. Buy backs have fallen from a peak of $1.15 trillion in the first quarter of 2022 to less than $750 billion in the second quarter of 2023. Corporations have shown a propensity to buy the most at the top (2007, 2022) and the least when stocks were cheap (2009, 2020).

Correlation between the S&P 500 and 10-year Treasury Bonds

The title of the June 1, 2021 Macro Tides was “Transitory Inflation? Not so Quick”. As you likely remember Chair Powell thought inflation would prove transitory. I didn’t agree. “The next six months could be tough for the FOMC as it tries to balance its messaging and the need to become less accommodative as noted in the May Macro Tides.” “The FOMC is about to be tested. In the next few months many factors are going to combine to make it look like a serious bout of inflation is beginning. The current surge in prices is stronger than at any time in more than a decade. Companies have the need and opportunity to raise prices into the post Pandemic demand funded by government stimulus and they will. Headline and core inflation rates are likely to reach uncomfortable levels for a FOMC that will continue to insist this bout of inflation is transitory.”

The correlation between Treasury yields and the S&P 500 extends beyond stock buy backs. The correlation between stocks and Treasury bonds was negative after 2000. Treasury bond prices increased in value as the S&P 500 fell during the 2000-2002 and 2007-2009 bear markets. This performance reaffirmed the value of the 60% stocks – 40% bonds portfolio allocation. Many investors and Financial Planners who began their investing career after 2000 have assumed that this negative correlation between stocks and bonds has always been that way.

My assessment that inflation wouldn’t be transitory led me to discuss the correlation between the S&P 500 and 10-year Treasury bonds in the June 1, 2021 Macro Tides. This analysis proved prescient as Treasury bonds failed to insulate portfolios in 2022. The correlation between the S&P 500 and Treasury bonds reversed from being negative to positive. In 2022 the S&P 500 and Treasury bond prices both declined, so the 60/40 portfolio didn’t protect investors as it had in the 20 years after 2000. In 2022 the 60/40 portfolio allocation experienced its worst performance in the last 100 years after losing -23.5%.

The following discussion of the Correlation between the S&P 500 and the 10-year Treasury bond is from the June 1, 2021 Macro Tides.

June 1, 2021 Macro Tides

June 1, 2021 Macro Tides: After the Federal Reserve lowered the federal funds rate to 1.75% in December 2001, the real after inflation federal funds rate became negative. In the past 20 years the real federal funds rate has been negative for most of the time. In 2006 and 2007 the real federal funds rate was positive after the Federal Reserve increased the funds rate to 5.25%. In the wake of the financial crisis the real federal funds rate has consistently been negative. Treasury bond yields fell after 2001 as the FOMC held the federal funds rate at 0% for extended periods of time, purchased trillions of Treasury bonds during Quantitative Easing programs, and by investors reaching for yield in a low yield world. The extraordinary change in monetary policy since 2001 altered the historical correlation between the S&P 500 and Treasury bond prices and could prove problematic.

Financial advisors and investors who had a traditional allocation of 60% stocks and 40% bonds during the bear markets of 2000-2002 and 2007-2009 were insulated from equity losses that exceeded 50%. Treasury bonds rewarded diversification with meaningful gains that helped offset equity losses in both bear markets. Investment Grade corporate bonds performed well in the 2000-2002 bear market and helped portfolios during the financial crisis with only a modest decline. During both bear markets High Yield and Junk bonds lost money although far less than equities. Given this recent history many financial advisors and investors are likely to expect Treasury bonds to perform similarly in the next equity bear market.

There are two reasons why financial advisors and investors may not be rewarded with positive returns from Treasury bonds during the next equity bear market. Treasury bond interest rates peaked in 1981 and trended lower until March 2020. During this secular bull market, each high in the 10-year Treasury yield was below the prior high and each low was below a prior low, which is the definition of a downtrend in yields and uptrend in bond prices. The 10-year Treasury yield topped just below 2.0% in November (1.971%) and December 2019 (1.947%), so this level is important. The expectation is that the 10-year Treasury yield will ‘test’ this area of resistance in the second half of this year, and potentially exceed it. Should the 10-year exceed 2.0% it would send a message that the secular bull market in Treasury bonds that began in 1981 may have ended in March 2020.

The second reason is that the negative correlation between Treasury bond yields and the S&P 500 is a relatively new phenomenon. From 1900 until 2001 Treasury yields and the S&P 500 had a positive correlation most of the time. As Treasury yields went up the S&P 500 declined, and rallied when Treasury yields fell. The exception was during the 1930’s and in the late 1950’s.

The above chart is based on Treasury yields and uses a 3–year moving average. The next chart is based on Treasury prices (futures) and uses a 60 day moving average of the correlation. Since it is based on prices and not yields, the axis of correlation is reversed with bond prices rallying while the S&P 500 falls and declining as the S&P 500 rallies. The 60-day moving is much shorter than the 3-year moving average, so it is more volatile but captures the short term swings that aren’t apparent in the above chart. In May 2013 the Taper Tantrum is clearly visible in the chart below, as the 10-year Treasury bond futures declined along with the S&P 500. This window of positive correlation between bond prices and the S&P 500 proved brief and was followed by years of negative correlation.

Starting on May 10 (2021) bond prices and the S&P 500 declined together for 7 consecutive days, which lifted the 60-day correlation to the highest level since 1999. On May 12 the Consumer Price Index hammered Treasury bonds and stocks, so higher inflation was a problem for both markets. The expectation is that inflation will continue to surge in coming months and Treasury bond prices will sink lifting the 10-year Treasury yield to at least 1.95% and potentially 2.15%. The increase in the correlation suggests the S&P 500 will decline as Treasury yields go up, with the S&P 500 falling to 3850 and potentially 3750.

End of excerpt from the June 1, 2021 Macro Tides.

With Treasury yields pushing to new highs in October 2023 I thought it would be a good time to review how the correlation between the S&P 500 and the 10-year Treasury has performed since June 2021. The nearby chart provides a clearer picture of how the correlation has performed since 1945. It illustrates a two year rolling correlation of weekly changes. It is effectively a 104 week moving average of the weekly changes. The change in the correlation from negative to positive didn’t develop as a result of the correlation. It was the result of the S&P 500 and Treasury bond prices moving down in 2022 and up after bonds and stocks bottomed in October 2022. Since July, the 10-year Treasury yield has climbed from 3.75% to 4.997% (TLT down -19.9%) and the S&P 500 has fallen from 4607 to 4110 (-10.8%), so the positive correlation is intact and at its highest level since 1999.

What Should 60 / 40 Investors Do?

If the Treasury bond market has begun a Secular Bear Market it increases the odds that the S&P 500 will underperform in coming years as well. Warren Buffett’s favorite valuation metric is the ratio of stock market capitalization to GDP. Just before the Secular Bear Market began in 1966, the ratio was 87.1%. By the end of that Secular Bear Market the ratio was 32.2% after valuations plunged by -63.0%. Equity valuations bottomed in 1982 less than 1 year after Treasury yields peaked and began a Secular Bull market.

When the bubble topped in 2000 the ratio was 159.2%. As of September 30, 2023 the ratio was 173.3% and higher than it was in 2000 and 61% higher than in 2009 when the S&P 500 bottomed. During the next Secular Bear Market the valuation of the stock market can be expected to fall below the -1 Standard Deviation dashed line which is modestly above the 2009 low. The risk of a 50% decline for the S&P 500 in the coming Secular Bear market is not low.

History suggests the traditional Buy and Hold approach using the standard 60 / 40 portfolio allocation could underperform much like it did between 1966 and 1982 when the correlation between stocks and bonds was strong (Correlation Chart)

Techs Stocks – The Darlings of Today

The Magnificent 7 stocks (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia and Tesla) have continued to attract money in 2023 based on Money Flow despite higher interest rates. The status of these stocks as being almost immune to higher rates and whatever happens in the economy, reminds me of 1999–2000 when the Dot.Com stocks were considered invincible, especially compared to cyclical stocks. Back then I noted that a slowing economy would force cyclical stocks to reduce capital spending, which would slow revenue growth for Technology stocks. When the economy slipped into a recession in 2001, revenue growth for Tech stocks slowed as cyclical stocks cut their tech spending. Investor’s willingness to pay nosebleed multiples for Tech stocks collapsed and the Nasdaq 100 (QQQ) declined by more than 80%.

The consensus on Wall Street is that the economy will avoid a recession. If growth does slow Wall Street believes the Magnificent 7 will still shine since they will grow faster than the economy. I think we’re likely to see a replay of what happened in 2000 and 1973. Back then the Tech darlings were called the ‘Nifty Fifty’ and Wall Street touted them as one decision stocks. You decided to buy and that’s all you needed to do. When the economy experienced a recession in 1973–1974, investors reconsidered, and then decided they would sell the one decision Nifty Fifty stocks after all. The economy will slow markedly in 2024 and a recession is likely. Sooner or later the concentration of ownership in the Magnificent 7 stocks will unwind and when it does there will be a race for the exit. The Magnificent 7 comprises 30% of the S&P 500 and the coming weakness in these stocks will drag the S&P 500 down just as they lifted the S&P 500 through the first 3 quarters of 2023. Third quarter earnings for Microsoft, Alphabet, Meta, and Amazon were announced during the week of October 23 and investors’ reaction to the reports was telling. Other than Alphabet’s poor earnings, the other 3 company’s numbers were good, but the stocks were sold after they initially rallied. This is not a good sign since investors decided to sell into the good news. This is how stocks that are over owned show the initial signs of forming a top.

Third Quarter GDP

GDP grew 4.9% in the third quarter according to the Bureau of Economic Analysis’s first estimate. The increase was led by an increase of 4.0% in consumer spending that contributed 2.69% of the total. As discussed in the October 23 Weekly Technical Review an increase in inventories was expected to inflate GDP. “In the second quarter of 2023 the Change in Inventories only subtracted -0.09% from GDP. When Q3 GDP is reported, Inventories may add to GDP since Wholesale Inventories were up 1.3% in July and up 1.8% in August. If the economy slows in coming quarters as I expect, retailers may be forced to cut orders as they again pare overstocked shelves.” In the third quarter the increase in inventories added 1.32% to GDP. A large change in the level of inventories is usually pro-cyclical, since they magnify strength during periods of growth and weakness when consumers cut back on spending. If consumer spending softens in the first half of 2024 as expected, businesses will respond by cutting orders which will subtract from GDP growth next year. An increase in government spending added 0.79% while Trade subtracted -0.1%.

The 4% increase in consumer spending was impressive but unlikely to persist. Spending in Q3 was funded in part by a further drawdown in savings. Consumers have been spending more each month than their income since the end of 2021 to have fun traveling, going to concerts, and sustaining their lifestyle. The San Francisco Federal Reserve has calculated that the large pool of Excess Savings accumulated in 2020 and 2021 was empty for 80% of consumers at the end of September. The reality is there is no definitive formula to accurately assess Excess Savings, so a bit of common sense is in order. The monthly data on spending and savings is fairly accurate and we know that Consumption has exceeded Income for almost two years, so the amount of Excess Savings has declined a lot. Whether that applies to 80% or 60% of consumers is secondary to a simple fact. The amount of Excess Savings is not inexhaustible. As long as consumers are spending more than they’re earning every month it’s only a question of when spending hits a wall, not if. The 12 month average of Savings prior to the Pandemic was 7.4% in December 2019. In September the Personal Savings rate was 3.4% down from 5.3% in May. This suggests that Excess Savings have been drawn down at a faster rate since May and are closer to being depleted for even more consumers.

The University of Michigan Consumer Confidence for October fell 6.0% to 63.8 from 67.9 in September. The decline was paced by a -9.9% drop in Expectations as 47% of consumers reported that high inflation was eroding their standard of living up from 39% in September. As I have discussed frequently, consumers are responding to the higher cost of living relative to 2019, rather than the 12 month rate of change in the Consumer Price Index which has fallen from 9.1% in June 2022 to 3.7% in September 2023. This is another confirmation that the pool of Excess Savings that many consumers have depended on is running dry. Whenever the percent of consumers saying inflation is hurting their standard of living has exceeded 30% a recession followed (1980, 1982, and 2008).

In the third quarter of 2007 GDP grew 4.9% so few were prepared for the recession that developed. In the December 2007 Macro Tides I provided ample warning about the risk of recession in 2008. “The economy is going to weaken further in the first half of 2008. This will expose even more credit problems, and there will be further deterioration in the housing market. It is going to take a fair amount of time to work through all these problems, given the magnitude of this crisis. The market has been able to hold up, but if investors begin to question whether the Fed is behind the curve in forestalling a recession, the market will be vulnerable to a significant sell off.” The FOMC wants to see the economy slow below trend growth of 1.8% for an extended period to make sure inflation will remain low after the Funds rate is lowered before the next expansion. When the economy slows in the first half of 2024 the FOMC will be reluctant to immediately cut the Funds rate. Wall Street will view any delay by the FOMC as increasing the odds that the FOMC is falling behind the curve in forestalling a recession. The stock market will be vulnerable to a sharp decline as Wall Street becomes impatient.

The stronger than expected growth in the third quarter was hailed as the final nail in the recession coffin. However, the FOMC has increased the Funds rate by the largest amount in 40 years and Lending Standards have increased for small business by the most in 40 years. Does the 4.9% increase in GDP in the third quarter eliminate the risk of recession in 2024? I don’t think so.

FOMC Meeting

The FOMC won’t increase the Funds rate at the November 1 meeting. However, GDP is well above the long term non inflationary level of 1.8% and headline CPI inflation for September was 3.7%. Chair Powell will say the bias to increase the Funds rate remains and that every meeting holds the potential for an increase. He can be expected to say in the post meeting press conference that the increase in Treasury bond yields since July represents a tightening as noted in the October 10 WTR. ““Since mid July the Dollar has rallied by more than 6%, the S&P 500 dropped by more than -7.0%, and the 10-year Treasury yield soared from 3.74% to 4.68% as of September 28. This has caused Financial Conditions to tighten again.” The tightening in Financial Conditions provides the FOMC some wiggle room to offset the strong Q3 GDP and sticky inflation without losing credibility. This Hall Pass is temporary and incoming data will need to show some softening in the economy and labor market to avoid a much tougher decision at the December 14 meeting.

Affordability Problems

As I have discussed previously the inflationary impulse that started in 2021 has ended, but the negative effects on the standard of living for many Americans will last a long time. The inflation impulse is calculated as a 12 month rate of change in the CPI and PCE and doesn’t take into account the cumulative change in the overall increase in the cost of living. The two largest purchases consumers make are buying a home and a car. In August the S&P Core Logic Case-Shiller National Home Price Index was up 2.6% from August 2022. According to the Labor Department the price of a New Vehicle was up 2.5% in September from a year ago. If one merely looked at the modest annual increases for Homes or a New Vehicle, one might conclude that they had become more affordable and be wrong. In August the S&P Core Logic Case-Shiller National Home Price Index reached a new all time high and relative to Median income is more stretched than in 2007. From 1965 to 2002 the Affordability Ratio of the Median Home Price to Median income never rose above 3.2 because banks insisted that the monthly mortgage payment not exceed 33% of a buyer’s income. In 2007 the Affordability Ratio increased to 4.06 as Lending Standards became nonexistent. This is how I assessed the increase in the Affordability Ratio in the September 24, 2007 Macro Tides. (The numbers cited were modestly different but the message is the same) “Between 1968 and 2000, the ratio of the median home price to median household income fluctuated in a narrow range between 2.8 and 3.2. During this 32 year period, increases in home prices were supported by a rise in household income. However, between 2000 and 2006, the ratio rose from its long term average of 3 to 4.5. This means median home prices have the potential to fall 33% should the ratio fall back to its long term average.” For the first time in history national home prices fell and by more than 20% after the 2007 peak.

A new report from real estate data provider ATTOM examined the median home prices for roughly 575 U.S. counties in August and found that home prices in 99% of those areas are beyond the reach of the average income earner making $71,214 a year. ATTOM estimates that a potential buyer would need an income of more than $125,000 a year in order to qualify for a mortgage on an average U.S. home. Housing Affordability is the lowest since data was started in 1989 and lower than it was in 2007. Affordability will improve after the FOMC lowers the Funds rate and mortgage rates come down. However, for Affordability to increase demand in a bigger way Home prices will also need to fall, as they did in 2009 – 2012. If home prices don’t decline there will be fewer consumers who will be able to buy a home which will weigh on economic growth.

In 2019 the average price of a New Car was $37,000 and in September 2023 was $47,899 according to data from Kelley Blue Book. Cox Automotive and Moody’s Analytic’s Car Affordability Index shows how many weeks of income are needed to buy a New Car. In 2019 it took about 34 weeks but in September 2023 it was 42.2 weeks, so Affordability has dropped 24% since 2019. The rate for the average car loan is 10.3% which is one factor that has caused Affordability to fall, but it’s not the only one.

The automakers have pared the number of affordable car models (< $25,000) from 36 in 2017 to 10 models in 2023, and the number of models costing more than $100,000 has jumped from 12 to 32. Profits are higher on the more expensive models and after the recent UAW deal, the automakers will continue to increase the average price of the models produced to offset higher labor costs. This strategy will falter once the economy slows and car buyers balk at paying higher prices. Unless the average price of a car declines the lack of affordability will curb demand and result in slower economic growth.

The FOMC can help improve the affordability of homes and cars by lowering rates but prices need to come down to really improve affordability and economic growth. It will either take a fair amount of time for Affordability to increase as incomes grow, or improve quickly if prices fall during a recession. Both of those options are not great for economic growth.


The Dollar declined after the Regional Bank crisis convinced investors that the long awaited recession was coming after all. When that view was trashed by better than expected economic data the Dollar bottomed in July.

In July I thought the Dollar was forming a bottom and would rally to 104.00, as discussed in the July 24 WTR. “In recent weeks I expected the Dollar to drop below the March low of 100.78 after forming a triangle pattern. The Dollar quickly fell from 104.01 to 99.58 after the CPI report. The sharp drop left the Dollar oversold which was why a rally to 100.75 – 101.00 was forecast. The Dollar rallied to 101.42 on July 24 and the extreme positioning suggests a rally above 104.01 may follow in coming weeks, especially if Chair Powell is hawkish.”

The economy is poised to slow markedly in coming months which should lead to a decline in the Dollar as currency traders game the first rate cut by the FOMC in 2024. At some point in 2024 the Dollar has the potential to decline to near the low in July. The Dollar is expected to rally above 107.34 and could reach 109 – 110 before it tops. The only question is whether the Dollar dips to 104.90 first, as explained in the October 30 WTR. “While the Dollar could immediately rally above 107.34, the more likely path is a decline below 105.36 and potentially down to 104.90 or a bit lower. This pattern suggests the drop to 105.36 was wave a of this correction, with the rally to 106.89 being wave b. Wave c would equal wave a at 104.91, which is why that is the minimum target.” Obviously, if the war in Gaza expands the Dollar could quickly rally to 109 – 110 in a flight to quality.


Gold is expected to rally to a new all time high in 2024 and could approach $2300, after breaking out above $2070. I think Gold is nearing the end of the initial rally and won’t be able to break out immediately. If Gold holds above $1975 it can rally to near $2050 quickly. If Gold trades below $1975, it will likely trade below the October 24 low of $1958 before the rally to $2050 or higher. If Gold holds $1975 and rallies I’m recommending selling IAU if/when Gold trades up to $2031 cash (IAU should be at 38.50 or higher). I recommended IAU in a Special Update on October 13 when IAU was trading at 36.50. If Gold drops below $1958 I may change the instructions to sell. I’ll send a Special Report if needed.

Treasury Yields

Treasury yields are expected to decline meaningfully in the first half of 2024. This forecast is dependent on two assessments. Fundamentally, the US economy is expected to slow significantly based on the three most reliable recession indicators - Yield Curve inversion, Leading Economic Index, and Lending standards. Each has reached a level that has foreshadowed every recession in the last 60 years. The large pool of Excess Savings that has enabled consumer spending to sustain the economy in 2023 is running down. Consumers have been spending more than their income since the end of 2021, so it’s not a question of if but when consumer spending hits a wall.

Technically, the chart of Treasury bonds and TLT suggests that a 5 wave decline from the March 2020 high is nearing completion. Once complete Treasury bonds and TLT should rally and retrace a portion of the decline since the top in March 2020. Treasury bond yields could push modestly higher and TLT could drop a bit lower, before Wave 5 of the 5 waves of decline is finished. In Wave 1 of Wave 5, TLT declined from 109.10 to 100.00. If Wave 5 of Wave 5 is equal to Wave 1, TLT could fall to 79.37 (88.47 – 9.10 = 79.37).

Once the Wave 5 of the 5 wave decline is complete, it would be reasonable to expect the retracement to cover 38.2% of the decline from the March 2020 decline, which would bring TLT up to 119.58. A 23.8% retracement would lift TLT to 105.50, and a rebound to wave 4 of lesser degree is 109.10.

Treasury yields have gone up in 2023 as supply soared. In the year ending September 30 the Federal government ran a deficit of $1.7 trillion, a record in a non-recession year. The Federal Reserve allowed $780 billion of its Treasury holdings to run off and US banks unloaded $500 billion of their holdings. In total supply jumped by $3 trillion, while the FOMC was increasing the Funds rate, and the economy continued to chug along. This story is well known and Wall Street is convinced that a recession isn’t coming, especially after GDP grew 4.9% in Q3. If the economy surprises Wall Street and slows more than expected Treasury bonds could enjoy a solid rally in the first half of 2024.


The big picture question is whether the low for the S&P 500 in October 2022 represented the end of the bear market and the launching pad for a new bull market. For months it really didn’t matter. I thought the S&P 500 would rally as the Dollar declined, Treasury yields fell, and the economy avoided a recession at least through the first half of 2023. In July 2023 sentiment became ebullient as investors embraced the ‘No Recession’ narrative as I noted in the July 17 Weekly Technical Review. “Optimism is running high that the FOMC will get inflation down without a recession. That is certainly possible but history suggests otherwise. The risk for investors is that the decline from 4818 to 3492 is Wave A (blue) of a large bear market. The rally from the October low would be Wave B (blue). In the July 27 WTR I pointed out the potential symmetry between the amount of time the S&P 500 had declined from its January 4, 2022 high, and the length of time it had rallied off the October 2022 low.

“Sometimes markets display a measure of equilibrium that is fascinating by trending up and down for the same amount of time. From its high on January 2, 2022 the S&P 500 fell for 283 calendar days until bottoming on October 14, 2022. If the S&P 500 rallied for the same amount of time it would top on July 24. The price targets suggest a potential stopping point for Wave B is 4500- 4550.”(The S&P 500 topped on July 27 at 4607) The almost perfect symmetry supports the Wave B interpretation.

After topping on July 27 a number of major market averages have declined in 5 waves.

The NYSE Composite includes 1700 stocks and the Value Line Composite is comprised of 1700 stocks that range from large cap to small cap stocks. The S&P 500 Equal Weight gives each stock a weighting of 0.2% so the Magnificent 7 only contribute 1.4% to its performance, rather than the 30% they add to the S&P 500. In the current environment the S&P 500 Equal Weight provides a better assessment of the market’s internal health, and it sports a 5 wave decline since July 27. On October 27 the S&P 500 Equal Weight was just 6.7% above its October 2022 low. Not much of a bull market! The Russell 2000 reflects the performance of Small Cap stocks and midsized companies are in the Midcap Index. The 5 wave decline in the NYSE Composite, Value Line Composite, the S&P 500 Equal Weight, the Russell 2000, and Mid Cap Index tells us two things. First, there will be a rally that retraces some portion of the decline since the July 27 high. The second, and more important message, is that a subsequent decline will likely take all of these averages to a lower low once the near term rally is complete. I continue to believe that this decline will occur once it becomes clear that a recession is coming.

As discussed in the October 30 WTR the market is oversold so the retracement rally was expected to begin. “The 21 day Advances minus Decline Oscillator tested the October 3 low of -540 last week and recorded a small positive divergence. The market is expected to rally and lift the Oscillator to near the neutral level (o black horizontal line). The S&P 500 can be expected to retrace 38.2% of the decline from 4607 to 4104 at 4296 and to 4355 if it retraces 50%.” The 61.8% retracement is 4415 so a test of 4393 is possible. This rally will likely be choppy and ideally will be an up, down (higher low), up to represent a counter trend a-b-c retracement. Where ever this rally ends it will provide an opportunity to lighten up and for aggressive traders to go short.

If the S&P 500 fails to get above 4260 and then closes below 4104, a far more bearish pattern is possible. The bearish pattern is that the decline from 4607 is a 1-2 to 4541, and another 1-2 to 4393. This next wave in this pattern would be a Wave 3 decline that will be scary.

If the high at 4607 is the high for Wave B, the S&P 500 is expected to decline to 3500 and likely lower in the first half of 2024. The 61.8% retracement of the rally from the March low of 2192 and the January 2022 high of 4818 is 3195. For now this is the likely path. After a rally in the next few weeks, a larger decline awaits. Plan accordingly.

Bank of Japan

The Bank of Japan met on October 31 and there was speculation that the BOJ would increase its 1.0% ceiling on the 10-year Treasury bond. In what can be described as a tweak that only a central banker could love, the BOJ said it would nimbly conduct market operations if the 10-year yield was above 1.0%. In July the BOJ said it would strictly cap the 10-year yield at 1.0% by nimbly conducting market operations below 1.0%. In response the 10-year yield popped from 0.85% to 0.975% so the market seems determined to see just how nimble the BOJ will be. My guess is the BOJ will come in strongly. We’ll see. When the BOJ increased the ceiling from 0.5% to 1.0% on July 27 I thought global yields would be pulled higher as the Japanese 10-year moved toward 1.0%. I can’t imagine the BOJ allowing the yield to exceed 1.0% without a forceful response. A reversal lower in the Japanese 10-year yield would help bring Treasury yields down. It would also ignite a rally in the Yen.

European Union

I thought the EU would slip into a recession and in the third quarter GDP fell -0.1% and will likely contract more in Q4. The EU’s post Pandemic recovery has been far weaker than the recovery in the US and the third quarter merely highlights the difference. In Q3 the US economy grew 4.9%. Inflation is coming down but is still far above the EU’s 2.0% inflation target. Economic weakness and progress on inflation is why the ECB decided to stop increasing its policy rate for the foreseeable future. The disparity in GDP growth with the US will continue to pressure the Euro until the US shows signs of slowing in early 2024. That should provide an opportunity to buy the Euro.


Total sales of the top 100 real-estate developers in the country were down -27% from the same month a year ago, when many parts of China were under Covid-19 lockdowns and related restrictions, according to China Real Estate Information Corp. On October 31 the National Bureau of Statistics reported the purchasing Managers Index for the manufacturing sector fell to 49.5 in October from 50.2 in September. The composite PMI for Services fell to 50.7 which is the lowest level in 2023. The expected softness in the Chinese economy is continuing and policy makers are responding. The Peoples Bank of China (PBOC) has lowered interest rates, instituted stimulus to support the failing property sector, and the top legislative body recently approved $137 billion to finance infrastructure projects.

The steps taken in recent weeks will help but the coming slowdown in the global economy in 2024 will limit China’s exports and weigh on growth. The key for China is whether Chinese consumers start spending more. I doubt they will as long as real estate values fall since real estate is their largest asset.

Consumer sentiment in China is negative after 3 years of extreme lock downs, weaker economic growth, high youth unemployment (+20%), and falling home values. Politicians (dictators) become dangerous when they become unpopular. Too often throughout history, wobbling leaders have rallied domestic sentiment by starting a war or conflict to unite the country. With the war in Gaza absorbing US military assets, an opportunity for China to move on Taiwan is possible. We live in dangerous times.

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