HELP: Lower long-term US government bond yields have been a big help for equities this year. They have boosted the present-value-of-future-cashflows and pushed stock valuations up. With earnings under pressure this has driven all returns this year. The good news is that yields are likely to stay down, and supportive. That is the message from our copper/gold ratio proxy, and our fundamental outlook for a hastening economic and inflation slowdown. Every 0.5% move in the US 10-year bond yield changes our fair-value P/E valuation multiple for the S&P 500 by +/- 8%. With yields moving inversely to prices, it’s also supports long duration bonds (IEF, TLT).
RATIO: The copper/gold ratio is a barometer of risk appetite, recession risk, and long term bond yields. Its predictive power comes from the very different uses of the two commodities. Gold is the oldest financial asset. It has been driven to near-record levels by safer haven demand, a weaker US dollar, and less competition from long bond yields. Whilst copper’s broad industrial real-economy uses see it nicknamed ‘Dr. Copper’ for its ‘PhD’ in economics. It has slipped as global growth expectations remain pressured, despite near term resilience with global PMI’s at an expansionary 54. Whilst China’s consumer-focused reopening has disappointed many.
TECH: One of the biggest impacts of well-anchored bond yields is on tech and Growth stocks. The dramatic big tech stock rally that led markets this year has three drivers. 1) Profits upside from the AI outlook and hefty cost cuts. 2) Safer haven investor demand for tech’s fortress balance sheets and double index average profit margins. 3) But also lower long bond yields pushing up ‘fair value’ valuations. Tech has been most sensitive to this, and has seen its P/E premium rise back to a historic high 30%. We think this is well-supported. @Four-Horsemen.
All data, figures & charts are valid as of 18/05/2023