10-29-24: Have Stocks (Finally) Begun to Notice Bonds?

by Ivan Martchev

October 29, 2024

There has been a huge move in Treasury yields, from 3.60% to 4.25%, in a relatively short period of time. I don’t believe this recent spike in Treasury yields comes from any fear of inflation, although one can never be sure, as the bond market typically does not verbalize its intentions. It would be similar to the stock market selling off by 5%, except that while the yield spike has happened, the stock market has rallied.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The cause of this rise in yields could very well be that the bond market does not like the trajectory of the federal deficit and is revolting against rising annual deficits – not as violently as with British gilts did when Liz Truss became prime minister of the UK for a very short time; simply put, British government bond buyers forced her out of office rather expeditiously. I don’t know who will win the Presidential election next week, but I expect that there will be extra volatility if President Trump wins (partly because of his unorthodox tariff policy), and there will likely be extra volatility if there is no clear winner by the next day, or week (similar to the year 2000), or if Harris wins and Trump doesn’t concede the loss.

With Trump leading in most polls, I have to point out that there wasn’t a single day in which he led in the 2016 pre-election polls, and he still won.  This time, because of the Biden/Harris switch in July, the Democratic base has been re-energized, so I feel the election may be a lot closer than the polls show.

Whatever the outcome, only a decisive Harris win will calm the market down, as she is, for lack of a better word, more predictable when it comes to economic policy. Any other outcome will likely cause volatility in both stocks and bonds. Suffice it to say about half the country is not rooting for either to win.

We finally may see some selling ahead of the election as the intra-day swings in the past week got bigger and we finally had a down week in the S&P 500, after six up weeks. Still, the stock market has fared a lot better compared to its 75-year record in presidential elections, rising in September and October, so far.

The Israeli Counterattack Seems to Be Limited

The Israeli counterattack against Iran finally came after the close on Friday and, so far, it appears that it is designed in a way that if Iran were to choose not to respond, the cycle may end there. In other words, it appears that the Israelis have bigger fish to fry in both Lebanon and Gaza and they do not need another direct war-front with Iran right now. If we are lucky, the situation will stop here, for now.

I was worried that Israel might hit Iran much harder and then Iran would have to respond, but so far that is not the case. If this situation de-escalates, we will have one less thing to worry about, geopolitically. It can always flare up again, given that Israel is not done in Gaza or in Lebanon. The Israelis have said that they want a regime change in Iran, but I don’t believe regime change can happen with airstrikes alone. Since Israel does not have the manpower or resources to invade Iran, a regime change is not possible.

We saw what happened with the last two U.S. engineered regime changes in the region. In Afghanistan, the Taliban is back in power, so that was a complete failure. In Iraq, Saddam Hussein is long gone but the Shia majority is in power, and they are friendlier today with Iran compared to the time when Saddam Hussein was in power. While not a complete failure, that regime change is not a resounding success.