Tough Winter for Markets Seen

If history repeats itself, it could be a tough winter in the bond and stock markets by one analyst’s reckoning.

Carl Palash, economist at MCM Moneywatch, says the performance of the Treasury’s benchmark 30-year bond had fallen into a pattern of behavior that typically occurs at the beginning of a bear market.

Palash tracked the monthly average of the yield on the 10-year Treasury bond going back to 1975. In two-thirds of the bear markets since then, the origin was marked by a rise of 0.25 to 0.30 percentage points in long-term yields over the previous month’s trading range, he said. On Friday, the 30-year bond closed at 6.83%.

“With the bond yield troughing at about 6.5% on a monthly basis in November-December, the recent rise in yields can be seen to be in line with [that] history,” Palash said.

“We’re negative on the bond market into the summer,” he said. “We think the economy’s coming in on the strong side and this will raise the risk of a Fed tightening.”

Palash said he also expects the stock market will peak in February before starting a major correction. Since 1975, stock market declines have followed three-quarters of bearish bond market periods, he said.

“Those findings don’t seem unusual, but I don’t know if they tell me anything,” said David Horner, senior economist for fixed-income research at Merrill Lynch & Co.

Horner agreed that the bond market is in for a tough winter, but looked for a strong rally in the spring.

“We know we had a stronger fourth quarter and we’ve certainly had a long period of low unemployment. However, as the year goes on, I think growth eases off in the U.S. even as it picks up overseas,” Horner said.

Tim Rogers, economist at Technical Data, also agreed with Palash’s near-term assessment of the market, but with some caveats.

“The market gets spooked all the time, so a 25-basis-point move isn’t that big a deal. Especially if you go back 15 years ago when interest rates were much higher, I’d find it hard to believe there weren’t 25-basis-point moves quite often” without ensuing bear markets, he said.

Rogers looked for a possible tightening of monetary policy by the Federal Reserve Board in March, but said the tide would turn abruptly in about six months.

“The market’s beginning to fear the economy is moving ahead too strongly and getting hung up on the idea that we’re going back to an inflationary mode,” Rogers said. “But we just had the lowest core rate of inflation we’ve had in 31 years.”

Inflation is decelerating, not accelerating, he argued, adding he foresaw long-term interest rates returning to 6.5% and perhaps even 6.0% by year-end.