MAY 2025
US bond yields and the US dollar typically move in lockstep but this relationship has broken down in recent weeks.
The chart below shows the 10yr Treasury yield (blue line) still trading well above 4%, despite the trade-weighted DXY index (red line) falling over 10% from its January peak.
This is unusual, but provides further evidence that capital has been flowing out of the US Treasury market into foreign assets amidst the Trump trade war uncertainty.
History suggests this disconnect won’t last because the cost of borrowing remains such a key driver of currency moves.
So we can expect either the dollar to rebound or bond yields to fall from here. The latter would be consistent with a looming soft patch for the US economy and a likely acceleration in Fed rate cuts.
The chart below shows the performance of the S&P 500 index in the aftermath of President Trump’s two election wins.
To make for an easier comparison, both starting points are rebased to 100.
The blue line shows an approxinate 60% capital gain for the US stock market in the 4 years following Trump’s November ’16 victory. Given the prevailing market volatility, note the multiple wild swings investors had to tolerate to secure that solid overall return.
Trump regularly aligned his Presidency to booming equity prices during his first term, but seems to have adopted a different playbook this time around.
But has he?
Per the red line, the S&P 500 has already shed 10% since last November’s election result (and is down almost 20% peak-to-trough this year), but such drawdowns are no different to the sell-offs we saw in 2016-2020.
Zooming out, it is hard to see the President tolerating a weak stock market for the duration of his second term.
In fact, the odds strongly favour him doing whatever it takes to boost the economy (and stock prices) well before next year’s mid-term elections.
The AAII Bullish-Bearish indicator is a measure of investor sentiment that is derived from a regular survey by the American Association of Individual Investors (AAII).
Each week, the provider asks its members whether they feel bullish, bearish or neutral about the stock market over the next six months.
The net indicator subtracts the percentage of bearish responses from the percentage of bullish answers and is usually deemed a good contrarian indicator.
Its recent collapse is thus encouraging.
In fact, sentiment has deteriorated so much since the tariff war began that this indicator is now back to its lows of the severe 2021/22 bear well market. It is also well below its pandemic trough.
This suggests investors have quickly moved to a more bearish stance which, in turn, infers a lot of the bad news is already priced in.
It sets the stage for a market rebound as we head towards summer.
A significant shift in equity market leadership remains underway despite the broad increase in risk aversion.
The chart below shows how the local stock markets of America’s key trading partners have performed since last November’s Presidential election.
It’s a gauge of relative returns so compares the respective index against the world stock market, in dollar terms and rebased to 100.
The three lines represent the main Chinese exchange (dark blue), Mexico (red) and Canada (light blue).
The message is clear.
The countries on the receiving end of Trump’s tariff war are seeing their stock markets significantly outperform.
This is contrary to what most investors expected and chimes with the idea that capital is rotating away from US assets.
Given the pronounced outperformance of US equities over the past decade, this trend could amplify going forward even if US stocks do rebound near-term.
The content of this communication is for information purposes only. Bentley Reid believes that, at the time of publication, the views expressed and opinions given are correct but cannot guarantee replication of depicted performance. Viewers intending to take action based upon the content of this communication should first consult with the professional who advises them on their financial affairs. Capital invested will be at risk, and you may get back less than you invest. The past is not a reliable indicator of future performance. Neither the publisher nor any of its subsidiaries or connected parties accepts responsibility for any direct or indirect loss suffered by a recipient as a result of any action or inaction, in reliance upon the content of this communication.
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