Why Stocks and Bonds Suggest Increasing Market Volatility
Just three weeks ago, we released an insightful report titled “The Fed Can’t Save This One: Why Bonds May Break The Stock Market”. This analysis warned that while the market had the potential for a bounce, broader concerns were lurking beneath the surface.
“While we see the potential for another leg lower in this bear market, we should see a sizable bounce first.”
Since that low on April 7th, the S&P 500 has surged by 16%, reaching our target zone of 5600 – 6050. However, as we’ve hit this milestone, we are pivoting to a more defensive strategy. It’s time to raise cash and reinforce hedges.
The Bond Market Signals Trouble
Right now, U.S. government bonds are sending an alarming message: demand is absent. In a normal economic climate, as growth and inflation subside, investors flock to the security of fixed yields. However, the current landscape is anything but ordinary. The absence of buyers is resulting in persistently high yields at a time when growth and inflation forecasts are rapidly deteriorating, primarily driven by a struggling consumer.
Alarmingly, the U.S. must refinance $9 trillion in debt this year. The pressure is mounting.
Key Observations:
Bond Market Resistance:
- If the bond market continues to falter, we will maintain our defensive stance.
- Technical Insights:
- We’re closely monitoring technical setups within the broader market to both manage risks and seize upside opportunities effectively. Our comprehensive 210% cumulative return and 27.6% annualized return stem from meticulous market analyses.
The Invalidation of the 60/40 Portfolio
For over three decades, the 60/40 stock portfolio model thrived in a low-inflation environment, where bonds acted as a stabilizer when stock prices plummeted. However, this traditional wisdom is being challenged.
- When the PMI for Manufacturing dipped, signaling a slowdown in economic activity, stocks followed suit, leading to significant drawdowns in the S&P 500. Inversely, government bonds typically surged during these periods.
“When growth decelerates… stocks tend to correct. Historically, this led to higher bond values… but since 2022, this correlation is broken.”
The Shift in Dynamics: For the first time in over 30 years, stocks, bonds, and growth all declined together. Inflation surged in 2022, peaking at 9.1%—the highest level since 1981—eroding the value of fixed yields and resulting in widespread bond sell-offs.
Consumer Struggles Are Real
Consumer sentiment has hit rock bottom, with the U.S. Index of Consumer Sentiment now at 52—signaling recession-like feelings:
“Consumer sentiment is worse today than during 2008 and 2009.”
Many are resorting to Buy-Now-Pay-Later (BNPL) loans for essentials. According to LendingTree, a staggering 25% of all BNPL loans are now used for groceries. Additionally, the rate of individuals late on these loans has jumped from 34% to 41%.
The Implications for Bonds
As the consumer struggles, the ripple effects are clear in corporate earnings reports. For instance, Walmart recently projected next year’s profits to be 27 cents below analyst expectations, causing its shares to plunge by over 6%.
Current forecasts indicate an impending slowdown in growth, with predictions of a 60% chance of recession by JPMorgan in 2025, combined with growing uncertainty.
“Yet, despite decreasing inflation and a struggling consumer, U.S. government bonds… are still not attracting buyers.”
This trend indicates an unusual decoupling between bonds and stocks. If this persists, it signals an essential shift in market dynamics—one that could force a major reevaluation of traditional risk models.
Key Levels and Technical Setups for the S&P 500
Keep your eyes peeled; we have identified significant trends and technical setups for the S&P 500. Following our previous analyses, we have cautioned investors since October last year. Our defensive positioning has been strategic, moving to 50% cash at the start of the year and eventually reaching a 100% hedge in February amidst mounting uncertainties.
Current Market Scenarios:
Bearish Outlook (Primary Expectation):
- This recent bounce may be a correction in a broader downtrend, leading to a probable retest of April lows.
- Bullish Prospect (Secondary Expectation):
- If the upcoming corrections show a higher low, we might witness one last uptrend potentially targeting 6300 – 6500.
The Bond Market: A Double-Edged Sword
Look at the TLT ETF, tracking long-dated government bonds. If it tests key support levels, we could see significant outcomes. If TLT fails to hold the $82 threshold, we might face yields exceeding 5%—a nightmare scenario for equities.
Conversely, if TLT can rebound, we could see a multi-month relief rally that suggests a return to the traditional bond-stock correlation.
Conclusion
Given the uncertainty in earnings, a struggling consumer environment, and increasing signs of market volatility, it remains clear that potential opportunities lie ahead. However, we must prioritize macro conditions in our investment strategies.
Be proactive. Attend our upcoming webinar for premium members this Thursday, April 17th, at 4:30 ET to discuss our game plan for the remainder of 2025, identify buy targets for exciting AI stocks, and strategize on cash raises and further portfolio hedges against ongoing market turmoil.
The I/O Fund boasts an impressive annualized return of 27.6%, ranking #2 among hedge funds in the U.S. Learn more here.
Disclaimer: Always consult with a financial advisor before making investment decisions.
Recommended Reading:
Engage with us as we navigate these markets together!
