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The Stock Market Party May Finally Be Over



  • The yield curve is steepening and it may very well kill the stock market rally.
  • As rates rise, it will make the equity market more expensive on a relative basis to bond yields.
  • It could result in a very steep decline in the equity market, as much as 39%.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

The stock market may have peaked, and everyone may have missed it. It's nearly impossible for anyone to call a top in the stock market, and one only tends to know it in hindsight. But that doesn't mean we can look at history and try to help us determine if this time will be different. If history proves to be an accurate predictor of the future, then the S&P 500 could drop as much as 39%.

Going back to the early 1990s, the yield curve has given us plenty of insights into where the stock may be heading. Over the past 30 years, the curve has been amazingly consistent, with the S&P 500 peaking at the bottom of and troughing at the top.

But more importantly, it's the period of time that follows the bottoming of the yield spread on the 10-year and two-year. It's the steepening that appears to be the killer of the equity bull markets or at least present the equity market with some serious turmoil.

The spread between the 10-year and two-year notes appears to run a rather defined cycle, with the spread narrowing towards zero as we enter or approach a recession and widens in periods when the recession has passed. This is a normal part of the economic cycle. More interesting is that despite the actual interest rate, the spread has consistently peaked around 2.6% to 2.8%, while bottoming around -50 bps to 0%.

Around 1990 to 1991 appears to be the mildest reset seen in the S&P 500 as the yield adjusted and began to steepen. During that period, the S&P 500 declined about 20%, and it was a shorted-lived pullback.

The periods of course with the greatest resets came during the year 2000 and 2008. Each period was different but in ways the

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Mott Capital is managed by Michael Kramer, a former buy-side trader, analyst, and portfolio manager with 30 years of experience tracking market fundamentals. He focuses on long-only macro themes and studies trends and unusual options activities to identify long-term thematic growth opportunities. Since its inception in 2016, the Mott Capital Management portfolio is up 115.4% using the fundamentals and macro trend-based approach to trading.

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Comments (500)

Dondomingue profile picture
Don’t worry until the yield curve inverts. When long rates are lower than short rates. A steepening yield curve indicates goon economic environment. The party’s just starting.
@Dondomingue , We have been progressing away from that for a long time.
Doug2000 profile picture
DOW is up 1854 points since this doomsday article was published.
@Doug2000 , But the NASDAQ is down.
Doug2000 profile picture
@kimbillro Well, the article mainly talks about the S&P 500 which is up 4.6% in the 8 days since the story published (a 209% annualized return).
@Doug2000 , Yes, I see what you mean.
H.a.i.r.y profile picture
"The yield curve is steepening and it may very well kill the stock market rally."

Author may want to re-check, what steepening yield curve means for equity markets.
@H.a.i.r.y , The long bond rate has gone from .50% to 1.60% while short rates have remained the same at near zero. That is a steepening yield curve. It is good for the banking system.
The new party has officially started today. If you wait for another drop you're going to miss out after today. All aboard for the next rally.
@President-Elect Stocker , Did they refill the punch bowl?
EliasMouawad profile picture
@President-Elect Stocker Gold is recovering today while Tech stocks are still weak.
@EliasMouawad tech is weak, but once it starts breaking out it'll push everything higher with it.
Skyfall7 profile picture
3rd wave or trap? Ftse100 definitely going for 3rd wave.
@Skyfall7 , The 3rd wave will shoot for the sky but fail to get that high.
Skyfall7 profile picture
@kimbillro for ftse 100. yeah its heavy in oil /mining.. might be few years yet, but still hopefully bit more lift left.
@Skyfall7 , Thanks for that information. I didn't know that about the FTSE.
jsantmyer profile picture
Can't agree with this thesis. IMO, the bull market still has a ways to go.

Although it will be subject to some deep retracements on occasion due to the fact we are at all time highs and stocks in general are overvalued based upon aggressive growth assumptions.

If you listen to what the FED has to say, I think most will agree their future policies during the pandemic will be conducive to further growth of the equity market.

How long, who knows for sure? IMO, we have at least the next 15-24 months before the aggressive money printing policies of the FED will catch up to us.
@jsantmyer , I give it 4 months.
@kimbillro I feel like you are both right. It could be tomorrow, it could be early next year. Timing these things is outrageously hard.
@dmzporter , I fully agree.
This has to be a bot.
You gotta wonder. If SA is paying these authors by number of comments etc., the guys who write the most outlandish articles like "Go to Cash for the Next Seven Years," and this one. They'll make the authors a lot of money, but their value to the reader is minimal imv. Nobody can predict the future though writers try all the time. Just buy good stocks that offer good value at the time and don't worry about the bond markets or whatever. That's what Warren Buffett does, and it's worked out pretty good for him.
Tao Jaxx profile picture
@Ruble Noon They're actually paid by the click, so the value is in the click bait.
Skyfall7 profile picture
@Ruble Noon they get paid by no of premium & pro members read their articles. True! 😂
Skyfall7 profile picture
@Tao Jaxx only pro & premium catch is worthy. So keep comments coming & don’t pay for someone telling us to sell up, retire & maybe buy some bonds.
My two cents worth. There are some/many retail traders that have been doing well trading tech on margins during the bull run up. Margin trades by total dollar increased by 60% over the last year. As interests rates raise the cost of a margin trade go up. The day traders are forced to liquidate causing stock prices to go down. Yes, $800,000,000 per month in margin trades is small potatoes but selling begets selling.
@Hurshoffin , It will morph to big potatoes.
@Hurshoffin algo's will do the rest... "the trend is your friend" until it isn't.
Just look at along term chart of the SMP on google. Now draw me the 2021, 2022, ,2023 portion but don't use a pen use a crayon 🖍️. I'm pretty sure the Fed had the markets back then also. Another thing that keeps brothering me is what does a stock market repricing look like in the age of robinhood? I'm not sure but I know it's going to be extremely fast. Also, no need to tell me that I don't know what I'm talking about. I already know I'm a dumb ape who probably belongs on r/wallstreetbets.
Most folks still think its to buy the dip, there is lots of room for pain till they realize the Fed has effectively tightened by giving green light to short bond speculators in a levered equity market (that they will sit back and watch) . What is to stop the market from falling now that the fed has said they won't protect valuations. Do intelligent people not really get this? I mean look ..if bond yields are to stabilize without intervention....maybe financials and energy can see further expansion in valuations from the mountain of liquidity flowing somewhere...probably overseas to what ever market has a more accommodating central bank. Do people not get the Fed is removing accomodation that was assumed this whole reflation by not defending low 10 year yields. That is a game changer....
joeliebig profile picture
@cpick8979 It's pretty simple. The treasury needs lower rates. The recovery needs lower rates. If we see higher rates at this point, there's a lot of pain ahead. Which is why everyone has an interest in it not happening. What's going on now is some drama, because the Fed wants to do as little YCC as possible. They'll do it in the end.
@joeliebig I tend to agree. The Bond Market seems to move rather quickly these days so i wonder what level we will find the 10 year and SPX at when the Fed moves. I just find it odd the commentary that Powell used if he plans on acting...he said about the worst possible thing..."rising rates can be seen as a indication of confidence"
joeliebig profile picture
@cpick8979 Short-term predictions are impossible. It's hard enough in normal times, but in times of unprecedented policy action, I don't dare to predict anything. Where will the 10yr be 1year from now ... 5 years from now? Are we on a path back to 3%? I don't see how that could possibly end well at all. We are going to see huge federal deficits for a while, and that just won't work. Unless, of course, taxes go up to service all that debt, which would crush the economy.
Skyfall7 profile picture
If following Fibonacci after retracted would it not look close to 3rd wave & the biggest. impossible for sure, but who knows these days.
@Skyfall7 , From 2009 I see we're in a 9th wave with the 10th wave = to a 5th crash wave.
Skyfall7 profile picture
@kimbillro blimey not gone that far back ( not that skilled on EW) I was taking it from march 2020.
@Skyfall7 , As you can see by my small comment total of only 42,395 comments that I prefer to focus on quality and not quantity as I can see you also do. Cheers, Bill
This article reminds me of one titled “the next leg down is coming” or something close to that by James K. It still comes up on my e-mail with new comments, now exceeding 3500. That poor guy has not been heard from in 9 months. Not sure if he was reading technical charts or Tara cards.
Wrong again Mott...but keep churning out articles every few months and one day you’ll finally be correct
Over for tech. New bull just started for commodities
@thetazbull commodities only go so far not 2x to 25x
@thetazbull New bull. You missed the first leg my friend.
joeliebig profile picture
@thetazbull I guess all the manufacturers don't need software anymore. Thus, a secular bull for commodities and industrials, while tech goes bust. Sounds about right?
Tao Jaxx profile picture
The only problem with this article is that it's 18 months late: The yield curve trough was August 2019 (at 0% 10Y minus 2Y). So, yes, it forewarned a correction. That correction happened exactly a year ago.
@Tao Jaxx , Better late than never.
mjessey profile picture
I believe the market has definitely topped. What we seen over the past week is just a starter. Yes another trillion point nine is coming into the market so it probably will rise. I believe after that, unless they print more and more and more, this market's going to go down. The devastation left behind will be massive inflation with less money to go around.
racerkeith profile picture
@mjessey Only 9% of that $1.9 T is going into the economy, the rest is lining pockets overseas and here and funding pork barrel politics.
@racerkeith Best to be quiet, your stupid is showing.
racerkeith profile picture
@jbc123 Thank you for proving my point that the Left does not want unity or dialog just compliance.
Tao Jaxx profile picture
Nice article. It is an established fact that the yield curve slope is a reliable predictor of recessions (as it inverts). I was not aware of its predictive value regarding stock market corrections as it troughs.
jakeelwood5 profile picture
What you are really showing is the Fed and the Government create havoc in the economy.
@jakeelwood5 Yeah, lets remove all the price signals and see what happens. They will probably talk about this moment a hundred years from now.
Tao Jaxx profile picture
@Mriske Good point. Which is why the Fed won't do YCC unless really things really get out of hand in the bond market.
@Tao Jaxx , They'll do operation twist.
edwin11k profile picture
"May" is the key word.
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