The Stock Market Bear That Began 19 Months Ago

Mainstream pundits have been telling stock investors throughout 2019 that it does not matter if long-maturity Treasury bonds yield less than short-maturity Treasury bonds. They have been explaining that you should ignore the fact that, for the most part, the 10-year yield has been offering less than the 3-month yield since mid-May.

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spreadly

However, financial institutions often rely on borrowing money at lower short-term rates and lending at higher longer-term ones. When the spread between short and long flattens, they struggle to find avenues of profitability. When the relationship between short and long flips on its head, public financial companies look to minimize risks altogether.

That’s where we are today with the inevitable inversion of the closely monitored 2s and 10s.

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2s-and-10s

There are those who will try to tell you that “spread lending” isn’t the only aspect of financial services. Yet those who have shared the faith in a diverse financial service sector have not been rewarded for that faith in 19 months.

Specifically, consider the Financial Select Sector SPDR Fund (XLF). It has experienced a bearish backdrop since January of 2018.

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xlf

The bearish backdrop over the last 19 months is hardly confined to the influential financial segment. A similar pattern has been seen in energy stocks as well as Materials Select Sector SPDR Fund (XLB).

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xlb

A number of comment providers will say, “So what? The overall U.S. economy is strong and the S&P 500 is still near all-time highs.”

My reply? The rest of the world’s top economies have never quite recovered from the 2008 financial collapse. In fact, governments are still providing extraordinary amounts of stimulus (a.k.a. “easy money”).

Is it working? Not if stock markets represent confidence. Nearly 12 years since the inception of the global financial system’s breakdown, U.S. investors have only seen gains in U.S. stocks.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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