The last few weeks have cataloged the meltdown of the bond markets with rates spiking up and prices slumping as investors moved out of the safety of bonds and stocks rallied. All told, it costs investors about $1 trillion in losses on the value of their bond holdings, while institutions that make money from higher rates like banks and insurance companies smiled as their stocks went up.
This is basically the cost of a turn around for what used to be touted as the new normal. For a long time now (since maybe 2013) stocks have been valued sky high as QE drowned the system in liquidity while bonds have also rallied because everyone knew that stocks were overvalued relative to their expected growth and were fleeing to the safety of bonds. So we had bonds that had zero and in some cases negative income being bought for their potential capital gains while stocks that had maxed out their capital gains were being bought for their income. The world had gone crazy and those of us who don’t have gobs and gobs of capital have been quietly buying conservatively valued stocks while waiting for sense to return to the building.
And it appears it’s starting to.
The $1 trillion decline in bond valuations to me is only a start. As interest rates climb, company earnings stall and Price to earnings ratios moderate, I fully expect stock valuations to come back to earth a bit before a Trump tripe combo of infrastructure spending, tax reform and deregulation sparks a more organic rise in stock valuations and inflation numbers once again.