So much for the summer “lull”.
Investors begrudgingly spent what should have been a vacation week attempting to navigate the treacherous waters around a Chinese yuan devaluation and aggressive rhetoric from an irritated Donald Trump, who is just three short weeks away from slapping 10% tariffs on the remainder of Chinese imports to the US.
The incessant currency/trade war headline hockey manifested itself in a harrowing selloff on Monday, and manic trading for the rest of the week, including outsized rallies on Tuesday and Thursday and a wild Wednesday featuring the best comeback of the year for stocks after a nauseating morning swoon.
And yet, through it all, the S&P remains just 3.5% from its all time high (top pane in the figure below).
How to reconcile that? It’s actually not difficult at all. The dividend yield for US equities is now higher than the yield on benchmark Treasurys for the first time since 2016.
Although earnings growth has (basically) flatlined, Bloomberg reminds you that the spread between the S&P’s earnings yield and Treasury yields is still higher than it’s been three quarters of the time over the past twenty years.
The bottom line is that we are now so far down the bond rally rabbit hole that we can’t even see a flicker of daylight. This week, the global stock of negative-yielding debt topped the $15 trillion mark.
Although August has tested the notion that plunging yields can continue to prop up equities and other risk assets (see the first linked post above), it’s hard to argue that stocks aren’t cheaper than bonds.
Meanwhile, plunging yields, the monetary race to the bottom and fears of competitive, deliberate currency debasement have pushed gold to six-year highs.
“Gold is now a better performing asset than the S&P 500 or a 7-10-year Treasury portfolio this year”, Nordea wrote, in a Friday note.
“The more negative the interest rates, the better the performance of gold prices, it seems”, the bank’s Andreas Steno Larsen and Martin Enlund remarked, before asking if it’s a “hunt for yield or [a] hunt for shelter?”
It’s both, gentlemen.