Overview
As of a few quarters ago, many were rooting for a decline in longer-term Treasuries. They argued that inflation had declined and that there was little reason to maintain rates at levels higher than those before the Biden administration. Some critics also argued that higher-than-necessary rates are unpalatable during an election year.
Well, the market’s wishes appear to have been granted; the 10-year Treasuries have collapsed from a recent high near 4.93% as of Oct. 20, 2023, to today’s print of 3.77%, a drop of almost 120 bps. However, this rate collapse has coincided with the collapse of most equity markets.
This installment examines major market drivers and possible outcomes.
Figure 1: Yield Trend Over the Past Three Months
Major Drivers
Below are some of the major drivers behind recent market action.
I. Heightened Middle East Turmoil – The conflict has materially escalated with Israel’s assassinations of two anti-Israeli leaders and associated fears of reprisal.¹ A taste of reprisal was experienced on April 13 of this year when Iran fired 150 rockets and 170 drones towards Israel.² As usual, we will avoid making political judgments and focus on the impact on investors. The current escalation trend appears difficult to stop.
Further, there is widespread concern about Iran acquiring nuclear weapons. Questions remain about what steps Israel might take to prevent Iran’s acquisition of nuclear weapons and what steps Israel might take if Iran is successful. It is likely that Iran already has some capabilities, such as “dirty” bombs. Complicating the conflict is the ambiguity of American involvement, and the clandestine involvement of China and possibly Russia.
II. End of AI Honeymoon – Nvidia has been Wall Street’s darling with a meteoric rise on the back of interest in Artificial Intelligence (AI). However, like all major market moves, the AI focus appears to have run its course, and the Fabulous One (in lieu of the prior Fabulous Four) now trades more like a mere mortal.
Figure 2: NVIDIA Corp Stock Performance Over the Past Year
III. Shifting Views on the Presidential Race – It appears the market is adjusting to the fact that Mr. Trump is losing momentum to President Biden’s acolyte Ms. Harris. Some might be concerned about a future increase in corporate and capital gains taxes.
IV. Rising Unemployment – Since the end of Covid-related lockdowns, the country has essentially been at full employment. That is no longer the case, and we are rapidly entering a period of more traditional unemployment. Below are charts from Bloomberg:
Figure 3: Rising Unemployment Rates
V. Other – There can be various factors at play, some of which might shortly become evident and others which never come to light. The large AAPL sale by Buffett comes to mind.
Some Perspective Please – It is painful and difficult to experience the downdraft in the equities market over the past week; however, the real economy on balance looks reasonably strong. The below chart for Apollo Global is comforting. Nonetheless, as usual, vigilance is warranted.
Figure 4: Daily and Weekly Indicators of the US Economy
Sources
[1] https://www.jpost.com/israel-hamas-war/article-813004
[2] https://en.wikipedia.org/wiki/2024_Iranian_strikes_against_Israel