The bond market giveth and the bond market taketh away. The S&P 500 Index closed in the red Thursday, blowing its widely-hyped chance at a nine-day winning streak, which would have been its best run since 2004. Of course, it was always going to be a meaningless superlative about an otherwise anemic stock market fueled by trends in bonds, not expectations about profits. Fittingly then, it was ultimately spoiled by a lousy 30-year bond auction.
First, consider the drivers behind the now-busted streak. Suffice it to say that of the eight up days, four or five were primarily driven by sharp gains in Treasury securities. Wall Street’s outlook for index-wide 2024 earnings has drifted slightly lower in recent weeks and has more or less been flat since April, with fixed-income markets overwhelmingly holding sway. When yields fall, the discount rates we use to value stocks decline as well, pushing stock prices reflexively higher.
For their part, bonds were — at least for a brief while — in a mini-snapback rally after investors got carried away predicting fiscal doom, enduring inflation and perhaps permanently higher neutral rates. I’ve been modestly optimistic about bonds recently, but there was never a whole lot of fundamental news behind the rally. At the margin, I might have cited a less-bad-than-contemplated quarterly refunding plan announced by Treasury this month and a Fed that’s sounded ever-so-mildly more dovish. But mostly it was just a temporary shift in sentiment, and Thursday’s session showed that’s a temperamental factor that could easily turn. All it took was a weak $24 billion 30-year auction, which drew surprisingly high yields, fanning the narrative that there isn’t enough demand for all the debt Treasury is selling to finance the government’s large deficits.
Breadth has also been less than stellar. From Monday to Wednesday this week, more S&P 500 stocks declined than advanced and overall returns were essentially carried by Microsoft Corp., which benefitted from a reported rebound in cloud growth, and Apple Inc., whose stock defied weak revenue from China to go on a bit of a tear.
In many disciplines, streaks are thought to be self-sustaining phenomena. Listen to press conferences with professional basketball or football players, and they’ll repeatedly allude to their efforts to get the ball to the player with the “hot hand.”