When I first started writing about rising US bond yields and their importance for the trend in US share prices the yield was two point something. Now it is four point something with no sign that the rise is over. It has already been staggering in its scale and rapidity by comparison with other periods of rising bond yields. It is no wonder that the US stock market and especially much followed high value US growth shares have endured wave after wave of profit taking.
As we are seeing companies are still producing impressive results, names like Netflix, Roblox and Intuitive Surgical. These positive announcements trigger sharp rallies but I do not think it is wise to chase them as long as my Coppock indicators are falling and bond yields are rising.
Governments and central bankers are not infallible. I am not especially talking about Liz Truss here but there you go; doing the right thing is not easy and so much is about perceptions. The authorities are trying to balance conflicting objectives. They want to keep the voters happy which often leads to short term palliative measures. They want a more entrepreneurial economy which often means tax cuts which can always be portrayed as favouring ‘the rich’. And right now they want to bring inflation under control and that is a painful process. It would be great if inflation would just go away but if it doesn’t we have to get on top of it which means bringing supply and demand into better balance.
At the moment we have continuing strong demand and inadequate supply leading to the famous shortages which are driving prices higher, sometimes explosively higher. Eventually everything will be discounted by share prices, we will be able to look over the valley to the sunlit uplands beyond, the worst will be over and a sustained rise in shares will be underway. There is no hard evidence as yet to suggest that we are there yet. It remains treacherous in global financial markets.
Above is my trusty QQQ3 chart, showing a UK-quoted ETF which tracks the Nasdaq 100 times three, with the additional impetus, which can be large, of being rebalanced every day. This is momentum investing with a vengeance.
After a long period heading higher, with periodic corrections, the chart is heading lower. The fall looks very much the inverse of the rise in US bond yields. As I have suggested there is a simple relationship. Bond yields go up, bond and share prices go down. Bond yields are still going up, my provisional forecast is that they are heading for five per cent. This makes it dangerous to buy shares and cryptocurrencies which are subjected to similar logic, bond yields up, crypto prices down.
I am trying to monitor this activity in charts and draw my conclusions accordingly. I don’t suppose any system is perfect but I have gone on record as saying I expect bond yields to go higher, share and crypto prices to go lower and the bear market to end next Spring. We shall see and obviously, like Keynes, if the facts change I will change my mind.
Like individual stocks, share markets overall respond to big ‘something new’ developments. One huge ‘something new’ was Covid and lockdowns which initially seemed bearish but quickly proved hugely bullish for shares, especially cutting edge technology businesses and anything which benefited from work from home.
The next big ‘something new’, aided by war in Europe, was an explosive rise in interest rates which had a negative influence. There will be more such ‘something news’ and we need to watch out for them.Underlying the rise in interest rates has been higher inflation as years of easy money meets supply shortages.
The news coming from individual companies is generally impressive. This was the key takeaway from the latest Netflix results.
After a challenging first half, we believe we’re on a path to reaccelerate growth. The key is pleasing members. It’s why we’ve always focused on winning the competition for viewing every day. When our series and movies excite our members, they tell their friends, and then more people watch, join and stay with us.Q3 2022, 18 October 2022
Another benchmark stock with great underlying fundamentals is Intuitive Surgical.
Our business fundamentals strengthened in Q3 with 20pc growth in da Vinci procedures compared with Q3 of last year and solid performance in each of our global regions. Our capital placements reflected 13pc growth in our installed base to meet procedure demand accompanied by continued increases in utilisation per system per year, healthy indicators for our customers and for us.Q3 2022, 18 October 2022
A more speculative but very exciting stock, Roblox, also saw its shares shooting higher recently including a 20pc leap in one day. Roblox provides the platform for a metaverse where people can create avatars of themselves and interact in all sorts of ways. The platform attracts millions of users and millions of developers for whom Roblox is an exciting financial opportunity.
The avatars are becoming ever more expressive and relatable to the user’s own appearance while the age range of the users is moving from children to teenagers to young adults which is attracting more ads. The latest results showed strong growth in a post lockdown environment.
We had a solid Q2, and then we followed this up with July, which was absolutely the biggest engagement month in Roblox history, including all peak COVID times. And the month of July was a peak across regions and across demographics.
In July, our DAUs [daily active users] were 58.5m, up 26pc year on year. And our hours of engagement were 4.7bn hours across the whole platform, up 25pc year on year. I want to highlight that this year-on-year growth and this peak engagement also included our core U.S.Q2 2022, 10 August 2022
At times like this I remember the great bear market of 1974 when UK share prices as measured by the FTSE All-Share index, fell over 70pc peak to trough. Shares in an exciting electrical distribution business, Electrocomponents, fell along with the stock market but eventually recovered and went on to scale new peaks. Looking back there was nothing in the fundamentals that suggested the shares needed to fall so much or even at all but fall they did; that’s what happens in bear markets.
All my benchmark shares are falling but in many, even most cases, the businesses are still growing. It is this which makes it certain that there will be a new bull market and it will be exciting