The Weirdest Market Recovery in Decades

THE YOUNG INVESTOR

becoming a great investor one mistake a time

Welcome to This week’s edition of Market Bites

Grab a cup of coffee, get comfortable, and catch up on financial markets.

I’ve been doing the reading and scrolling, to bring you the most relevant updates.

Before we dive-in, take a look at:

MARKETS YEAR-TO-DATE

The S&P 500 Is Flirting With All-Time Highs

Two months ago, we were all bracing for a trade war meltdown.
Now the S&P 500 is about 3% from making new highs.

Markets have a way of flipping the script when nobody’s looking.

Now its looking like one of the strongest recoveries from a 20% drawdown in over a century.

This has only been possible thanks to the market’s belief that the trade war for all intents and purposes is over.

The non-fancy way of explaining this is The TACO trade 😄

Trump. Always. Chickens. Out.

It went viral last week when a White House reporter had the balls to ask Trump about it to his face. Talk about markets meeting meme culture in real time.

For the last month the market has continued pricing in more TACO rather than real tariffs. And Trump has kept delivering.

This is another of those moments where the signal is in the price action. Before things totally make sense. Before a perfect narrative like TACO takes form.

So, we wait to see if Trump keeps feeding the 🌮 trade.

Stay tuned for the market impact of Trump and Elon’s all-out public battle 😁 

Checking In On The Bond Market

The U.S. bond market continues in its longest drawdown ever.

That’s 5 years of pain, with a max loss of -17.2%.

For something that’s supposed to be the “safe” part of your portfolio, this has been a brutal stretch.

The unwinding of the ultra-low interest rate environment that lasted from the GFC to the pandemic has been a structural change in the bond market.

Another example of this shift:

The yield spread between Microsoft’s 30-year bond and the U.S. 30-year Treasury just hit its tightest level ever.

Basically, investors now price Microsoft’s long-term debt as almost equally safe as the U.S. government.

That’s not a bet on Microsoft’s greatness. But because confidence in U.S. fiscal management is shaky. And this particularly affects long-dated Treasuries.

That’s why, in my portfolio, most of my cash is sitting in very short-term Treasuries.

Right now, the extra yield for locking your money in treasuries for 30 years instead of 6 months is only 0.6% in annualized yield.

Not worth it. Not when the long end is exposed to inflation risk, fiscal risk, and the brutal math of bond convexity.

That said, the flip side of the current bond rout is that for the first time in over a decade investors can finally earn a decent yield on U.S. debt.

Still, higher long-term yields come with another cost: high 30-year mortgage rates.

Which is bad for both aspiring home owners and the home construction sector.

International Equities Continue to Roll

If you looked closely at the YTD performance chart up top, you might of noticed something that hasn’t happened in a long, long time.

International equities, both developed and emerging, are beating the S&P 500 by more than 15% each.

And that hasn’t happened in decades:

A big part of the story is Europe.

European stocks are breaking out of a 25 years of stagnation (f… crazy right?).

These markets didn’t suddenly become sexy again overnight.

They simply got cheap enough, stable enough, while everybody had gotten too overweight the U.S.

This is why I have been talking about diversification lately. And why you need it in your equity portfolio.

Its not our job to predict when one region or another is going to outperform the other.

A globally diversified portfolio will still lean heavily U.S. (about 60% by market weight), which is not the same thing as being all-in on America.

INTERESTING CHARTS of the week

This chart tells a simple but important story:

Since the Fed started cutting short-term rates last September, the long end of the U.S. Treasury curve has actually moved up.

The overnight rate (controlled by the Fed) dropped from nearly 5% to 4.25%…

But the 30-year Treasury yield climbed from under 4% to nearly 5%.

Fun fact: Nearly half the gains from investing in the S&P 500 over the past 30 years came from reinvested dividends, not just stock price growth.

Quiet. Boring. Incredibly powerful.

PARTING WISDOM

from JIM CHANOS:

The man behind the QUOTE → Jim Chanos is probably the most famous Wall Street short seller alive today. He made his name shorting Enron. And has spent decades doing deep forensic research and digging up dirt on companies whose story and numbers don’t add up.

thanks for reading and have a great weekend,

Al Atencio