US stocks and bonds tumble as mortgage rates rise and economic data falls below expectationsPosted on 06 June 2013 with 1 comment from readers
US stock markets seemed to be entering a correction phase yesterday with the S&P 500 losing 1.4 per cent and 10-year treasury bonds have fallen recently with yields up to 2.1 per cent. It is relatively unusual to see equity and bond markets crash together but this maybe where the Fed’s money printing is taking us next.
The idea of a ‘Great Rotation’ with a smooth transition by investors from bonds back into stocks is already looking a wild fantasy. Bonds had their worst monthly decline in three years last month but the four-year-old stock market rally also faltered and showed signs of extreme fatigue.
Valuations are certainly very overstretched for what looks to be the peak of the profit cycle. US stocks command price-to-earnings ratios double their European counterparts. They have priced in an economic recovery that may now be delayed or prove to have been a total illusion created by money printing.
What analysts fear most is that all of the recent better economic data from the US may be the result of asset price inflation, that is rising house and stock prices that naturally have some knock on effect in terms of consumer confidence and spending, up to a point.
If the recovery is a sham and mortgage rates are on the way back up – and that is what a falling bond market brings – then the US may find itself facing a far worse economic crisis than in 2008-9, one in which most of the savings of the nation will be decimated by plunging stock and bond markets.
Accident waiting to happen
Investors just don’t seem to be expecting this at all. They have chosen to believe the weasel words of the Fed and their brokers who make a commission on transaction turnover not the direction of the markets. This has been a big mistake.
The problem is that a bubble can deflate quickly and cause widespread wealth destruction. How quickly the lessons of subprime have been forgotten. You might imagine after one storm that people would prepare for another. Instead they walk cheerfully right into the path of the next twister.
There is still a chance to batten down the hatches or run for the hills! Just sell, sell, sell while it is still possible…