Treasury yields are pushing toward their highest levels since 2002 even as the S&P 500 trades near all-time highs. JPMorgan Chase CEO Jamie Dimon describes the risks facing the market as tectonic plates, pointing to geopolitical conflict, high inflation, elevated leverage, and high stock valuations.
Bond investors sell while stocks stay near highs
Bond investors are selling, and yields are moving higher in response. The 10-year and 20-year Treasury yields are both near their highest levels since 2002, a stretch that predates the 2007-2009 Great Recession and the end of the dot-com bear market.
Because yields move opposite to bond prices, the climb signals that bond investors demand higher yields to compensate for rising perceived risk. Yet the S&P 500 is trading near record highs, and its valuation now sits at levels last seen just before the dot-com bubble burst.
Dimon warns of a market earthquake
JPMorgan Chase CEO Jamie Dimon has described the risks facing the market as tectonic plates, hinting that a collision could cause a market earthquake. He points to geopolitical conflict, high inflation, elevated leverage, and high stock valuations as the forces at work.
Adding to the uncertainty, the Federal Reserve has begun limiting the guidance it gives markets, a return to its more normal mode of operating after guidance became unusually important during the Great Recession. At the same time, the Fed is actively fighting inflation, suggesting interest rates are likely to keep rising, and bond investors appear to be pricing in rate hikes they fear are coming.
Why a recession could follow
Rate hikes are a blunt instrument, and they could trigger a recession, which is usually followed by a bear market. Dimon has said the risks today could stay contained, but history suggests now is the time for stock investors to prepare for a possible recession and bear market, since both are a normal, recurring part of investing.
That preparation can mean reassessing risk tolerance, letting some cash accumulate, taking profits on winning positions, and shifting toward sectors such as consumer staples and utilities, which have historically held up better during downturns. Ignoring the bond market's warning and hoping for the best is not a strategy.
Source: The Motley Fool
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