Chart of the Week - Stock/Bond Ratio
The tides are turning, important information and critical decisions for asset allocators...
The US stock/bond ratio has rolled over from extraordinary price levels + excessive relative optimism in stocks vs bonds + extended positioning + extreme expensive valuations for stocks (both absolute and relative to bonds).
Meanwhile, the macro backdrop is about as unfavorable as it gets for the stock/bond ratio; heightened uncertainty, reform-like policy moves, and declining economic confidence makes the risk of recession a real possibility (and the Treasury Secretary is basically telling us this).
The fiscal contraction aspect is also a double whammy in that it is a headwind for stocks and supportive for bonds through the possibility of short-term decline in growth/inflation, and improved sovereign credit quality from the prospect of a better fiscal position if DOGE is maximally successful.
Remember: the stock/bond ratio goes down when you get either-or-both of stocks falling and bond rising.
The stock/bond ratio was always going to be at risk of a sharp drop coming from a starting point of high valuations for stocks, high sentiment, and high portfolio allocations… especially given cheap valuations for bonds, low sentiment and low allocations to bonds (particularly following the bond shock and dismal returns in recent years — investors as a group tend to be highly focused on recent returns; momentum chasing/fleeing).
As things currently stand, there is a long way to go before we can get excited about stocks vs bonds from a valuation standpoint, and if anything you typically see downside overshoot during periods of mean reversion like this.
So from an asset allocation standpoint it sure seems prudent to rethink the stock/bond mix, particularly vs where portfolios might have drifted to in recent years as stocks significantly outperformed bonds. The key point really is to not be fixated on what used to work in recent years, because that (and the consensus industry positioning) is likely to be dangerous and suboptimal in the coming months and years.
Key point: Stocks are turning the corner vs bonds; asset allocators take note.
Where-to Next for the Stockmarket?
Just check out the Weekly ChartStorm —not only will it help provide clarity on what’s going on right now, but it will also help you navigate the ups and downs.
The last few editions received particularly good feedback from subscribers in helping frame the next steps, keeping perspective +staying alert to risks AND opportunities…
16-March Edition — weighing the short-term vs longer-term outlook
In the latest edition I walk you through the key technical levels/triggers, evidence supporting the prospect of a short-term rally, and then zoom out to the bigger picture risk backdrop for longer-term minded investors.
9-March Edition — a focus on risk and rotation
In the previous week’s edition I stressed that although we could get a short-term bounce, there are larger forces in play; also emphasizing the tactically relevant rotation opportunity in global vs US stocks.
2-March Edition — risk alert on the changing market tides
This one focused on the changing tides in longer-term sentiment metrics across investors, consumers, and Wall Street + building risk pressures — and how this marked a transition into a riskier phase for markets [good timing!].
That followed a number of risk alerts the previous week also; so the evidence was certainly there for those prepared to look for it (good reason to subscribe!)
Bonus Chart: Global Perspective on the Stock/Bond Ratio
As I shared with clients earlier this week, there’s a highly important distinction to make when it comes to the moves in the stock/bond ratio —this is a US thing.
If you look at global markets, the trend we see in emerging markets and developed markets ex-US is that the stock/bond ratio is actually moving higher. Europe and China are stimulating their economies and turning up out of slowdown, things are really changing in Japan, and even LatAm is looking good —much of the world’s stockmarkets are going up and enjoying a weaker USD and rotation flows out of US into global markets.
Not only does this help frame what is going on in the US with the turn in the stock/bond ratio, but it also hammers on the global vs US rotation theme. As alluded to above I think we are early on both of these major asset allocation themes.
Subscribe to Topdown Charts Entry-Level (or full service) for further insights.
— Aussie Stock/Bond Ratio
As a bonus chart and a plug for my new Aussie markets pack, here’s how the Australian stock/bond ratio is tracking. Much like the USA, it is looking very much stretched —certainly relative to the usual range/trend it typically travels in.
As it happens the latest chart pack shows Australian equities close to fair value (slightly expensive, but certainly with pockets of sectors looking much more expensive than others e.g. tech, financials, and others looking cheaper).
But more important: Australian Commonwealth Government Bonds and Australian Corporate bonds are both showing up as very cheap — and with their trend score changing from downtrend to strengthening uptrend. That is about as bullish as it gets: cheap + emerging uptrend = big opportunity. Click through to access the latest pack (free for Topdown Charts clients).
Topics covered in our latest Weekly Insights Report
Aside from the chart above, here’s what’s in our latest entry-level service report:
Global Markets Update: credit spreads, USD, gold, commodities,
Defensive Stocks: relative performance of miners, utilities, staples, healthcare
Stock/Bond Outlook: weighing up the next steps for asset allocators
Macro Risk Radar: what’s on the radar, market setups to be alert to
Ideas Inventory: current list of open/live ideas and views
Subscribe now to get instant access to the report so you can check out the details around these themes, as well as gaining access to the full archive of reports.
For more details on the service *check out this recent post* which highlights:
a. What you Get with the service;
b. the Performance of the service (results of ideas and TAA); and
c. What our Clients say about it.
But if you have any other questions on our services definitely get in touch.
Thanks for your interest. Feedback and thoughts welcome.
Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts
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NEW: Services by Topdown Charts
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Callum Just wondering if you can write something on leveraged ETFs. I was looking at them yesterday. Seems investors have been catching the falling knife. To me, leveraged ETFs and the put call ratio are v interesting as while there's been lots of negative press about stocks, if you look at the flow data, investors seem very willing to buy the dip (not just leveraged but in general, big inflows into equity ETFs).
I think this is one reason why stocks can't bounce. As despite huge month end rebalancing flows, positioning just isn't short.
It's about time US stocks experienced some mean reversion compared to the rest of the world.
1) "As things currently stand, there is a long way to go before we can get excited about stocks vs bonds from a valuation standpoint, and if anything you typically see downside overshoot during periods of mean reversion like this."
2) "Much of the world’s stock markets are going up and enjoying a weaker USD and rotation flows out of US into global markets."
Stock vs. bond ratio of US, developed, emerging markets (2000-25): https://substack-post-media.s3.amazonaws.com/public/images/39f7af52-a933-4379-890a-a797cebf5338_1375x860.png