Key Charts: No Signs of Credit Stress and Trillions of Cash

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by financialsense

In light of the recent blowout economic numbers, here are some key highlights from our weekly investment video update, Get Ready for Market and Economic Surprises, on what investors should expect in the months ahead.

Peak in Rates?

The big spike we’ve seen in interest rates (with a corresponding sell-off in the bond market) may be getting close to an end. Looking back over the past 30 years, whenever rates have moved this far, this fast (as measured by the 1-year rate of change shown below), this has usually led to a subsequent cool-off or top in yields.

Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results.

Looking at the relative performance of short-term vs. long-term bonds, we can also see this trend is now pretty extended and may be due for a reversal.

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Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results

“At this point we’re seeing a lot of non-confirmations of this recent move to new highs in the 10-year Treasury, where we’re not seeing foreign yields following,” Financial Sense Wealth Management’s Chris Puplava said. “We’re not seeing certain relationships following, which probably signals an imminent turn in long-term interest rates.”

No Signs of Credit Stress, Piles of Cash

This chart shows the S&P 500 on top against multiple credit spreads ranging from single A (high quality debt) all the way out to triple C (low quality debt) vs the 10-year Treasury. Credit spreads signal economic and market stress and, as you can see, widened and narrowed along with the Covid crash and eventual bottom last year. As of now, credit spreads are narrow, indicating very little stress in the market or the economy.

credit spreads
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Another supportive factor for the overall market is the massive amounts of cash that are sitting on the sidelines along with the big pullback we’ve seen in corporate buybacks, Puplava noted.

corporate cash buybacks
Source: Bloomberg, Financial Sense Wealth Management. Note: Past performance is no guarantee of future results.

“We’re likely to see use of this corporate cash used for capital expenditures and R&D, but also likely see a pickup in buybacks,” Puplava said. “I think companies themselves would be a strong support to the stock market this year in general, or on any type of a pullback.”

To watch this full video presentation, see Get Ready for Market and Economic Surprises posted on Financial Sense. For regular weekly investment updates or to access our full archive of video presentations, subscribe to our YouTube channel or visit the Financial Sense video page.

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