When Fed tightening ends, nothing performs better than 30-year Treasurys — not even the S&P 500, top economist David Rosenberg says

David Rosenberg

Known for identifying the housing market bubble in 2005, David Rosenberg is the chief economist and strategist at Rosenberg Research & AssociatesRosenberg Research

  • 30-year US Treasury bonds should outperform the stock market as the Fed tightening cycle nears its end.

  • That’s according to top economist David Rosenberg, who called the 2008 housing crash. 

  • Rosenberg said the current stock market rally “has been rather junky.”

Bonds should outperform stocks as the Federal Reserve ends its cycle of hiking interest rates, according to top economist David Rosenberg.

The Fed hasn’t hiked interest rates since its July meeting, and the market isn’t expecting a rate hike at the Fed’s last FOMC meeting of the year next month. That’s a big deal because historically, a five-month pause of no interest rate hikes marks the end of the Fed’s tightening cycle.

If the Fed does keep interest rates unchanged at its December FOMC meeting, “the cycle is over. The next move would be a cut,” Rosenberg said in a Financial Post op-ed on Tuesday.

And that’s good news for bonds, as a decline in interest rates would drive bond prices higher.

Rosenberg explained that during a period when the Fed holds rates steady, the 30-year US Treasury significantly outperforms stocks.

“In that pause period, bonds and stocks tend to rally together. But nothing does as well as the 30-year Treasury, which traditionally delivers an average total return of 9% point to point,” Rosenberg said. That outperforms a 7% return for the S&P 500 and a 6% return for investment grade and high-yield bonds over the same time period, according to Rosenberg.

The outperformance is significant not only because of the sizable difference in returns, but because investors are taking on less risk when buying long-term bonds relative to stocks.

And Rosenberg is skeptical that the recent rally in the stock market is sustainable, as the surge has been “rather junky” and “lacks fundamentals,” according to a Wednesday note from Rosenberg.

Rosenberg said the S&P 500’s six percent rally over the past 10 days has happened alongside soft earnings guidance, and without the participation of small-cap stocks.

We have seen a rather sharp outperformance by stocks that were most shorted, have weak balance sheet, and non-profitable tech,” Rosenberg highlighted. “A polarized rally with no verve in small caps [indicates] concerns about economic momentum.”

Economic concerns for Rosenberg include a steady reduction in monthly jobs added to the economy, as well as an unemployment rate that has jumped 50 basis points from its cycle low, from 3.4% in April to 3.9% in October.

“That, indeed, is a recessionary signal,” Rosenberg warned.

Read the original article on Business Insider

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