September 30, 1981: All-time High of the US 10-year government bonds with approx. 15.8%, Canadian counterparts with 18%. Even if there have also been years of strong sales and rises of more than 100 bp, the mega-downward trend in bond yields has never been called into question during the last 38 years.
Until now. Of course, it is courageous to predict the imminent death of the bond bull. But the sustainable increase of yields for 2 years and the outlook for further increases point to change. US bonds jumped to 3.2% and Canadian to incredible 2.61% after 0.95% only two years ago.
The combination of robust US economic data, new highs in US equities, high oil prices with simultaneously small 10-year government bond spreads, and future stock market returns leads to the question of correct stock valuations.
So, hands off equity exposures, as current developments suggest? Not so fast. At first, it is not the absolute but the relative ratings that are decisive. Besides increasing bond yields, also companies’ earnings expectations have also risen. The fundamental environment is sound, and bond yields are likely to level off in the course of a normalizing monetary policy.
And what about Brexit, Italy and the trade dispute between the USA and China? There are sufficient triggers for a crash and numerous Cassandras. But strictly speaking, these are political issues which are all solvable, and growing pressure on the responsible politicians to come to agreements.
Presumably, the markets will be much higher by the end of the year, and in our view a good opportunity to purchase some of the favorite stocks at a lower price.