As we wait, and the anticipation builds, for the Fed to lay the groundwork for a new easing cycle the market has, as usual, moved in advance. The 10-year treasury yield has fallen from 4.70% at the end of April to 3.875%, which is quite the move lower. If we look at the 6-month rate of change for the 10-year yield it has fallen by 10% (4.275% in February to 3.875% now). I bring this up because it is one of the 4 components to what Jim Paulsen calls a ‘Bull Environment’.
Paulsen had a great update on the bull environment this morning and what stock performance is like with bull conditions in place. His 4 conditions:
- Annual real GDP growth of 1%
- An annual inflation rate lower than 6 months earlier
- 10-year treasury yield lower than where it was 6 months ago
- Annual growth in M2 money supply greater than where it was 6 months ago
Real GDP increased at an annual rate of 2.8% in Q2 2024 with Q3 current estimates in the 2% range. Inflation using CPI has moved lower over the last 6 months from 3.1% in January to 2.9% in July. I already mentioned that interest rates are lower than 6 months ago. And M2 annual growth rates are higher than 6 months ago at 0.98% for June (little bit of lag in this data) compared to -2.62% in December. All conditions are in place right now, and that is usually a great time to be a stock investor.
Since 1951 there have been 291 quarters and only 41 meet the bull environment definition. The returns are quite impressive during those 41 quarters with annualized total returns of 23.6% with positive returns 85% of the time.
Source: PaulsenPerspectives.substack.com. As of 8/19/2024
I guess it is not too surprising to know that stocks perform great in a slowly growing economy with falling inflation and falling bond yields while liquidity is improving! A very soft-landing type of outlook.
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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