Introduction
If we are to trust the wisdom of Wall Street legend Bob Farrell’s first investing rule in the current market landscape, it may indicate that Treasury yields have reached their peak while stocks are likely to experience a decline. This notion is supported by David Rosenberg, former chief North American economist at Merrill Lynch and current president of Rosenberg Research.
Markets Return to the Mean
Farrell stated that financial markets tend to return to the mean over time, setting the tone for his ten rules of investing. In light of this, Rosenberg suggests that we find ourselves at a short-term turning point in the financial markets, as indicated in a recent note.
Decline in Treasury Yields Expected
In recent times, the 10-year Treasury yield (BX:TMUBMUSD10Y) approached a significant high of 5%, a level not seen since 2007. However, the yield has since receded to 4.874% as of Tuesday. Rosenberg predicts that the yield will likely continue to decline from here onwards.
Recession Signs on the Horizon
Based on historical data, Rosenberg noted that recessions typically follow the end of a monetary tightening phase imposed by the Federal Reserve. On average, it takes approximately two years for a recession to commence after the Fed’s initial interest rate hike. As a result, Rosenberg believes that there may be more definitive signs of an impending recession in the first half of 2024.
Impact on Treasury Note Yields
During past recessions, the average decrease in the 10-year Treasury note yield amounted to 150 basis points, according to Rosenberg’s analysis of historical data. This provides further insight into how Treasury yields could be impacted moving forward.
Unusual Inversion of the Yield Curve
Rosenberg highlighted that the yield curve has been inverted for over a year, which is an abnormal condition that has only occurred 15% of the time throughout history. This observation serves as an additional factor worth considering in the current market environment.
In summary, Bob Farrell’s key investing principle suggests a potential shift in the market landscape, indicating that Treasury yields may have peaked while stocks face the possibility of a decline. David Rosenberg’s analysis supports this notion, providing valuable insights into the possible path ahead for financial markets.
Potential Upside in Government Debt, as Bond Yields Revert to Historical Mean
If history is any indication, the 10-year Treasury note yield could reach 3%, resulting in a potential 16% gain in government debt over the next twelve months, according to renowned economist Rosenberg. As bond prices and yields typically move in opposite directions, this upward shift in yields would be beneficial for investors.
Homeowner Affordability Ratio at Record Low
Declining Equity Risk Premium
Rosenberg also highlights the declining equity risk premium, which is currently approaching zero for the first time since 2002. The equity risk premium measures the additional return investors receive from owning stocks compared to safer options like Treasuries.
Potential Correction in Stock Market and Bond Yields
Should mean reversion occur, Rosenberg speculates that the S&P 500 could correct further to around 3,200 or 3,300. Simultaneously, he anticipates a corresponding decrease in the 10-year Treasury note yield within the 2.5%-3.0% range.
On Tuesday, US stocks experienced gains, with the Dow Jones Industrial Average (DJIA) rising by 0.4%. The S&P 500 (SPX) saw a 0.7% increase, while the Nasdaq Composite (COMP) gained 0.5%, based on data from FactSet.
