Subscribers to Chart of the week received this comment on Sunday, September 16.
Despite all the hand movements in the stock market over the past 12 months, sometimes it’s worth zooming out on the chart for some much-needed context. The SPDR S&P 500 ETF Trust (SPY) at last look was up 57%. However, while digging through this data, we found a coincidence that deserves a deeper dive. The Cboe (TNX) 10-Year Treasury Yield sits at a five-year return almost identical to that of the SPYs, at 56%. If you have deja vu, it’s because we’ve been in this situation before.
At the end of July, we covered the event in which the five-year yield of SPY and TXN sitting at an identical +50%. This happened on June 14 and 15, according to the white and orange lines touching in the chart above. But three months later, on September 14, the five-year return of SPY and TNX synchronized at +50% and are touching again. In July, this signal marked a bottom for the stock market, as the TNX and SPY quickly moved in opposite directions, and investors enjoyed a brief summer respite from an otherwise dismal 2022.
A quick historical reminder of the importance of “big round numbers” is necessary. TNX hit a low of -75% in the summer of 2020 before bouncing back 50% (twice) this summer. SPY has seen many pullbacks to 0% during the pandemic, peaked at just under 100% and is now clearing 50%.
If the past is any precedent, the connectivity of the TNX and SPY will face a tough test next week. The latest data from the CME Group showed a xx% increase in the odds of a 100 basis point interest rate hike from the Federal Reserve next week, up from xx before last week’s CPI data. . TNX and SPY could very well separate next week, but the extent to which they deviate from the 50% level, given its historical context discussed above, will be remarkable.
The future of TNX and SPY symmetry will face a tough test next week. The latest Fed surveillance data from the CME Group (CME) showed a 20% chance of a 100 basis point hike in Federal Reserve interest rates next week. Prior to Tuesday’s CPI data last week, those odds were 8%. The TNX and SPY could very well split next week, but the extent to which they deviate from the 50% level, given the historical context discussed above, will be remarkable.
The June symmetry occurred at a Fed meeting where a 50 basis point hike was imminent, and the central bank’s decision did not shock markets. But should the Fed really up the hawkish bet with a 100 basis point hike next week, the symbiotic nature between the SPY and TNX will be in pieces. If the expected 75 basis point occurs, perhaps the June convergence could signal the end of general market instability.
Many of us will read this and be oblivious to the global crisis. But if current trends continue, it will be soon enough for all of us. Most of us learned in elementary school that 97% of the water on the planet is salt water. And only about 1% of the total water supply is drinkable.
This becomes a difficult calculation for several regions of the world. A severe multi-year drought causes water levels to drop to historic lows. And the federal government is threatening to cut water use by 25% in the hardest-hit states of Arizona, California and Nevada.
And even if we are not subject to water restrictions, we are all likely to see higher food costs. One reason is that about 25% of the country’s food supply comes from California. A 2021 American Farm Bureau Federation survey found that 40% of farmers have sold a portion of their cattle herds.
But opportunities arise in the midst of the crisis, and it makes no difference. In this special presentation, we look at seven water stocks that sound like smart buys as the world searches for solutions.
See “7 Water Stocks to Buy as the World Goes Dry”.