Not a newsflash, but November 2023 was a monster month in terms of returns for most major asset classes. SP500 +9.13% for November, Barclays Aggregate Bond Index +4.55%. Massive, outsized moves which are the direct result of weak investor sentiment, poor positioning, and the realization by investors that global central banks’ battle vs. inflation is done. Markets LOVE when the Fed goes from hiking rates to pausing to maybe cutting rates next. In November 2023 we saw UST yields materially lower, the USD materially weaker, and risk assets of any size/shape rip.
It’s been a while since I borrowed David Zervos’ line about “2s and SPOOS” but that’s the playbook for 2024 and 2025, I think. We’re talking about 2s (as in 2y US Treasuries) and SPOOS (as in market slang for SP500 futures or stocks in general). 2s will follow the path of Fed policy, which to me looks like rate hiking is done, pausing is a winter activity, and rate cutting could be next sometime mid-2024. Risk assets LOVE when 2s change direction but I think that’s exactly where we are at. The rate cycle has peaked, yields head lower, and stocks beyond the Magnificent 7 (or 8) have reawakened from their 24-month slumber.
It’s about 2s heading lower in yield: Over the past 45 days, US Treasury yields have declined approximately 75-100bps. This is a major change in direction. We’ve been saying it for a while: inflation is falling everywhere, and the labor market will be the last to fall. The softening of the labor market will lead 2y UST lower, which is consistent with a peak in rate policy and a peak in UST yields. Note the 2y UST yield chart below.
Source: Bloomberg Finance LP as of December 4, 2023
And it’s about Spoos LOVING 2s heading lower in yield: stocks (SPOOS) had a big November, but as Sean D. has been saying for a while, when the stock market experiences “thrust” (improving breadth, improving participation accompanied by a violent move higher in stock prices) it’s not a “one and done” event. “Thrust” rarely happens but when is does FORWARD RETURNS look very good/great. The DeGraaf data below looks at all “thrust” moments back 40 years. 12-month forward SP500 returns look strong to quite strong. Spoos love lower 2s.
Source: RenMAC Research as of December 7, 2023
CWM Theme #3: 2s and SPOOS offer the clues.
Richard Barrett
Chief Investment Officer
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