The Trump Bump Is Kaput


Is the domestic stock market finally topping out? Given the vagaries of a tweet-driven U.S. trade policy, it may be too early to say definitively. One thing we can say is that the Trump Bump has collapsed.

Cast your peepers on the plot below. The red line represents the spread between the 10-year Treasury note yield and the dividend rate on the S&P 500 (the grey line is SPX, the S&P 500 itself). The spread is often thought of as a confidence indicator. Why? Well, think about it this way: As stock prices rise, their dividend yields – barring corporate actions raising payouts – naturally fall. Without a concomitant decline in yields, i.e., rising T-note prices, the yield premium rises.

The T-note’s been fairly consistent in its offer of a yield premium over stock dividends lately. The ten-year paper’s paid more than the index dividend 77% of time over the past five years.

Notice how the yield premium shot up in November 2016? In little more than a month following the presidential election, the yield premium ballooned by 83 basis points as stocks – especially big stocks – were enthusiastically bid up in anticipation of a pro-business, anti-regulation Trumpian economy.

(Click on image to enlarge)

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But then came the Tariff Tantrum of 2018 which plunged stocks and the yield premium into an end-of-year holiday funk. Stocks subsequently recovered – and then some – in 2019, but the yield premium’s rebound turned weak and ultimately faltered, resulting in the divergence you see above.

Finally, last week’s Fed rate cut set the bond market on fire, knocking the 10-year yield below 2% for the first time since October 2016 and with that, the yield premium went negative, just like it was immediately preceding the election.

So, has confidence in the stock market fatally slipped? There are certainly plenty of signs that we’ve reached an inflection point.

First, there’s the XLY/XLP ratio – pitting the price of the Consumer Discretionary Select Sector SPDR (NYSE Arca: XLYagainst that of the Consumer Staples Select Sector SPDR (NYSE Arca: XLP– scrunching up into a narrowing congestion area. Breakouts emerge from such patterns. BIG breakouts that either confirm the preceding trend or mark a reversal.

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Disclosure: None.

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