A Bull Market and a Bear Market at the Same Time
Interest rates on longer-term bonds climbed to 24-year highs Thursday morning. The 10-year yield hit 5.338%, and the 30-year hit 5.679% intraday, both the highest levels since mid-2002, while the 2-year is slowly approaching 5%. The iShares 20+ Year Treasury Bond ETF ($TLT) dropped sharply overnight, and oil is higher as well.
Most of the pressure is at the long end of the bond spectrum, which suggests this isn’t about what the Fed might do later this month. This is about the competition to borrow substantial funds for decades in a world that needs a lot of capital. Governments worldwide are competing with massive hyperscalers for capital, and that is driving up long-term rates. How the stock market handles this competition for capital is the trillion-dollar issue.
Good Numbers, No Reaction
Micron Technology ($MU) is trading around flat after a strong report. Revenue came in at a record $54.2 billion, up from $11.3 billion a year ago, and the company guided to $61.5 billion for the current quarter. CEO Sanjay Mehrotra put it this way: “AI is becoming Super Intelligence (SI), and memory enhances this intelligence and the competitiveness of our customers’ platforms.”
That has been the recent pattern for the SI leaders. They put up good numbers and strong guidance, but expectations are so high that the results don’t produce much positive price action. Analysts raise their targets and the valuations look reasonable, but there is a hesitance to chase.
We have a similar dynamic with the overall economy. Growth is quite strong, but it isn’t being embraced with much enthusiasm. Iran, interest rates, oil, inflation, and worries about the cost of living are holding back any surge in optimism.
How the Gap Closes
This odd mix of sentiment has created the two-tiered market we’ve been dealing with. It is almost like a simultaneous bull market and bear market, depending on what you are looking at.
Divergences like this don’t last forever. The question is how this one resolves. The pessimistic view is that the SI bubble pops and that closes the gap. The more positive view is that the laggards start to find support and produce better relative strength. The most likely outcome, in my view, is some combination of the two, with the SI leaders slowing a bit as money rotates into the stocks that have been hurt by higher interest rates.
Interest rates will be the catalyst for closing the gap, but we will have to wait and see how that shows up. Until long-term yields stop climbing, the rotational money has little reason to leave the mega-caps.
Game Plan
ISM manufacturing is out at 10 a.m. ET, and the jobs report comes Friday. I’ll be watching how bonds respond to both, since the bond market has been ignoring good news lately. My posture hasn’t changed. I’m holding plenty of cash and waiting for the bond market to give me a reason to get more aggressive.
The good news is that the two-tiered action is becoming more extreme, and periods of transition like this one create the next round of great trades for those who can navigate them.
At the time of publication, Rev Shark had no positions in any securities mentioned.
