For some perspective on the post-financial crisis rally, today’s chart illustrates how much of the downturn that occurred as a result of the financial crisis has been retraced by each of the five major stock market indexes. For example, the Dow peaked at 14,164.53 back in October 9, 2007 and troughed at 6,547.05 back on March 9, 2009. The most recent close for the Dow is 19,855.53 — it has retraced 174.7% of its financial crisis bear market decline. As today’s chart illustrates, each of these five major stock market indices have retraced over 170% of their financial crisis decline. However, it is the tech-laden Nasdaq that leads the pack with a retracement of 269% — impressive considering the severity of the financial crisis bear market.
1. Gundlach Deck is Out…10 Year Taking Out 3% in 2017—End of 35 Year Bond Bull?
“Almost for sure we’re going to take out 3% on the 10-year in 2017,” Gundlach said. If we exceed 3% (not 2.6%) in 2017, it’s goodbye to the bull market because you would no longer have declining peaks in yields.
A 10-year above 3%, with the 30-year yield approaching 4%, would also be trouble for the equity market because they would start to look like ‘real’ yields to investors.
Gundlach said it’s not radical to forecast a 6% yield on the 10-year by 2020.
1.Yield Curve Steepening and Showing No Signs of Recession.
The Yield Curve Reflects Good News
I find more reason for optimism in the yield curve – the plot of the yields on 3-month through 30-year Treasury securities. The yield curve has steepened since the election, and this is good news.
The slope of the yield curve has borne a consistent relationship with economic activity. The yield curve has predicted all U.S. recessions except one since 1950. Recessions, as you would expect, correlate positively with bear markets. When the yield curve flattens, or inverts, a recession usually looms and so does a bear market.
That’s not the case today. The yield curve is just the way we should like it – progressively higher with each maturity and upward sloping to the right. When the yield curve steepens, economic growth usually follows.
1.2016–Russell 1000 Value +15.83% vs. Russell 1000 Growth +7.28%.
Since then, the iShares Russell 1000 Value ETF (ticker: IWD) has returned 17%, versus 9.1% for the iShares Russell 1000 Growth (IWF). The last stretch of significant outperformance for value ended in 2006, and it was a whopper. Value beat growth by double-digit percentages in five out of seven years, starting with the 2000 dot-com stock bust.