Will market leadership change back to value since rates are on the move? Long-duration growth stocks are convex to interest rates, and the relative performance of cyclicals/value stocks (especially financials and energy) is positively correlated to rising yields. (THREAD)
So, in theory, if bond yields rise to a new equilibrium (I’m guessing 2% for the 10-year), then value should take over for now. /2
I doubt the latest employment report will dissuade the Fed from starting its taper soon, so that suggests that in 2022 the bond market could be facing the opposite supply/demand dynamic as in 2021. /3
In 2021, the Treasury issued less paper (it was running down its cash balance at the Fed), while the Fed continued to buy $120 billion per month. Next year, it could be the opposite, if the next two rounds of fiscal spending get funded right as the Fed tapers to zero. /END

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More from @TimmerFidelity

14 Oct
Would a rotation from growth to value benefit non-US equities? In principle, yes, but the earnings picture for MSCI EAFE (Europe, Australasia and Far East) and EM (and especially China) suggests some caution. (THREAD)
The chart above, and the ones below, use the Datastream “squiggles” series for consensus earnings estimate progression by calendar year. The estimates run from the February before the calendar year to the February after. /2
The top panel above shows the dollar estimates and the bottom panel shows the progression from the start of each squiggle. The yellow bars show the 36-month Z-score of the MSCI USA total return. /3
Read 9 tweets
13 Oct
The market is in mid-cycle and is following a typical pattern. This chart shows earnings growth in light blue and P/E growth in pink. The blue bars extend into 2022 because they include current estimates. (THREAD)
See the pattern? First, the market bottoms, then earnings typically bottom a few quarters later. In between those two inflection points is a big expansion in the P/E multiple. /2
From there, the P/E ratio peaks on a rate-of-change basis, then earnings growth goes positive, then the change in the P/E ratio turns negative, and then earnings growth peaks. /3
Read 5 tweets
12 Oct
Price follows earnings, except at the tails. Very negative earnings growth tends to produce positive returns (red dots below on the left), because this usually occurs at market bottoms. This chart illustrates earnings growth (horizonal) and the S&P 500 return (vertical). (THREAD)
On the other hand, very positive earnings growth does not seem to be correlated (see the pink dots on the right in the chart above). /2
Historically, when earnings growth is above 30%, the regression line for earnings vs. price is flat as a pancake. Investors don’t reward extremely high earnings growth because it tends to be unsustainable. That's what happened in 2018 following the tax cuts. /3
Read 4 tweets
11 Oct
Gaining ground: Bitcoin is back up to around $55k, which is still $10k below its all-time high of $64,870 but marks a significant improvement from the summer lows of $30k. What’s interesting here? (THREAD)
This rally has come with little fanfare & doesn’t seem driven by momentum chasers. As we see, the percentage of coins held by short-term “tourists” is down to just 15%, below levels seen at bottoms. This tells me there could be room to run if momentum chasers pile in. /2
In terms of price momentum, Bitcoin’s move doesn’t seem excessive. Below, the bitcoin/gold ratio along with its de-trended Bollinger Bands, measuring the number of standard deviations from its trend. /3
Read 5 tweets
8 Oct
Where are we headed on the correlation between stocks and bonds? With some renewed upward pressure on bond yields, there's a tug-of-war between nominal R-star (The Fed’s published R* rate plus the current 2-year inflation rate) and monetary velocity. (THREAD)
As you can see above, the 10-year yield is somewhere in between those two. Will monetary velocity pick up and follow nominal R* higher, or will the current inflation spike be transitory and bring nominal R-Star back down? It’s one of the existential questions of the day. /2
My guess is that yields will rise cyclically, but remain in a secular down-trend, driven mostly by demographics. But I do think that inflation will be somewhat higher over the next 10 years than it has been over the past decade, driven by wages and housing. /3
Read 7 tweets
29 Sep
Time to debunk that laziest of bubble arguments: the market-cap-to-GDP ratio.
It's severely lacking as a valuation metric. The ratio doesn't consider interest rates, which are at multi-year lows. It also does not consider operating margins, which are at multi-year highs. /2
Most importantly, comparing the S&P 500 to US GDP does not account for the fact that US large caps have become more and more global over the years. So let’s fix it. /3
Read 6 tweets

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