Sideways Over…What Is Next?

The sideways moves in financial markets these past few months has provided a respite from the unprecedented moves experienced in the first half of this year. A sideways move, also known as a correction, can confound market participants particularly traders and speculators who are generally trend followers.

Bond watchers should know the trend by now as bellwether interest rates on the ten-year U.S. Treasury note climbed from a low of 0.31% on March 9^th, 2020 (prices/yields per Bloomberg) to 3.50% on June 14^th, 2022. Those yields equate to a price of 111-19 in 2020 on the ten-year 1.50% U.S. treasury note due February 15, 2030, and 86-14 in June, for a loss of over 25 points.

The summer sideways action saw bond prices rally with the bellwether treasury note trading at 93-03 on August 2^nd or 2.50% for a nice, quick one hundred basis point correction over about six weeks for a six-plus point gain…but now sideways is over. This week the yield on the ten-year note is now back over 3% (3.11% as of August 25^th).

The trading action of the bellwether ten-year note is instructive because this is how corrections work. Yes, the 3.50% level in June was a new high for the cycle but it also a new high dating back 11 years! The ensuing correction was swift (so far, a matter of weeks), but it does not change the trend.

The current question for bonds is whether the correction (sideways action) continues for a few more months or whether bonds hit new higher interest rates (new lower prices) in the coming weeks.

As I said earlier, corrections confound. During the almost forty years of the bond bull market there were numerous corrections. These were times when interest rates rose rather than declined. Some corrections were quick while others lasted many months. We liked to call these corrections buying opportunities because it gave us a chance to buy bonds at cheaper prices as we were confident the long-term trend of the bond bull market called for higher prices (and lower yields) and we would be rewarded for doing so.

That was before 2020. Now that the trend for bonds is now a bear market, with rising interest rates and falling bond prices, we need to flip our thought process. Corrections in a bear market are when prices move higher, providing selling opportunities as the next downdraft will bring still lower prices.

Now let us turn to stocks. Stocks are now in a bear market, not since 2020 but since 2021 or the first few weeks of 2022 depending on your market flavor of choice. Therefore, the correction in stock prices since mid-June when the S&P (for example) traded at 3637 on June 17^th to August 16^th when it traded at 4325 would be a selling opportunity as we prepare for new stock market lows. Indeed, this is the opposite of bull market behavior when buying on the dips was a great time to buy. This is the importance of knowing the trend.

A bear market for stocks means that once the upward correction (sideways) is over, the next leg down will set new price lows. Perspective here is difficult for most of us because we may not remember a similar time in which “buying the dips” did not work. The bull market has been in effect for so long most of us take it for normal.

A similar time did exist in our bellwether ten-year note. After setting the low yield in March 2020 at 0.31%, yields moved higher, trading at over 1.50% a year later. A sideways correction ensued for many months as yields went back down to near 1% in August 2021.

For those who believed the bond bear market was continuing, the move higher in interest rates was a buying opportunity. We were never in that camp. When sideways ended, yields streaked higher as the bond bear market continued with yields hitting 3.50% in about ten months. This rapid deterioration in prices looks to me to be the current situation for stocks as investors discover the stock bull market is indeed over.

With long-term bond prices deteriorating and the forecast for the stock bear market to reassert itself, the coming story will be where one where does one hide to escape such downward price carnage? The answer is select, worthwhile bonds. Interest rates have been on the move higher (prices lower) for a while. Now look at your portfolio statement and compare your portfolio performance to that of other alternatives. There is a difference.

Not all bonds are long-term bonds and not all short-term bonds will perform equally. During the bond market correction over the past several months, bond prices firmed, again, a time to sell. As the bear market trend reasserts itself, we should have better opportunities to find the worthwhile bonds we seek to weather this bear market storm.

Del Valle Independent School District, TX

Unlimited Tax Schoolhouse Bonds, Series 2022

AAA S&P (AA Underlying)

Permanent School fund Guaranteed

Due 6/15   Dated 9/15/22 Maturity 6/15/47

$268,545,000 Sold

Years   Maturity           Coupon      Yield*

2         2024             5.00%           2.31%

3         2025             5.00%           2.34%

4         2026             5.00%           2.38%

5         2027             5.00%           2.43%

6         2028             5.00%           2.46%

7         2029             5.00%           2.54%

8         2030             5.00%           2.64%

9         2031            5.00%           2.72%

10       2032**          5.00%           2.79%

11       2033**          5.00%           2.97%

12          2034**        5.00%           3.10%

13          2035**        5.00%           3.20%

14          2036**        5.00%           3.26%

15          2037**        4.00%           3.75%

16          2038**       4.00%           3.80%

17          2039**       4.00%           3.86%

18          2040**       4.00%           3.93%

19          2041**       4.00%           3.99%

20          2042**       4.00%          4.04%

25          2047**       4.00%           4.16%

*Yield to Worst (Call or Maturity) ** Call 6/15/31

Source: Bloomberg

This is an example of a new issue priced the week of 8/22/22

Prices, yields and availability subject to change