It’s beginning to look a lot like Groundhog Day! I know—it’s not as catchy as the true holiday original, but we deal in facts here… and those are the facts. The S&P 500 and NASDAQ 100 closed the month of October at all-time weekly highs. November kicks off the “best six months of the year” for the stock market. Breadth, while not confirming, is still fine. Treasury volatility is falling off a cliff.
S&P 500 & NASDAQ 100
The two major U.S. indices—the ones everyone tracks—closed at record weekly highs to end October. What’s more impressive is that they gapped higher, meaning that on Monday morning, demand so outstripped supply that the market had to jump to a new equilibrium level. Both remain well above their rising 60-week moving averages.
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Source: Optuma
'Tis the Season
With the major averages trading at record levels, the best six months of the year begins for the S&P 500.
Source: Optuma
The MOVE Index
For those who don’t know, the MOVE Index is the VIX for Treasuries. It’s falling off a cliff, normalizing after the major spike in 2022 and early 2023. This is an encouraging development for investors who incorporate Treasuries into their portfolios as a diversifier/hedge.
Source: Optuma
Stock/Bond Correlation
As mentioned above, falling Treasury volatility is a positive for investors who use Treasuries as a diversifier/hedge. Note that the one-year correlation between stocks (S&P 500) and Treasuries (10-Year Note) has turned negative again.
Source: Optuma
Why? It's All About Inflation Expectations
As systematic investors, we don’t usually concern ourselves with “the why.” But sometimes it’s fun to talk narrative. As we’ve been saying for a while, the why for all of this is inflation—or more precisely, the belief that inflation is under control. In fact, our inflation composite, which is a blend of three different inflation metrics (CPI, 5-Year/5-Year Forwards, 10-Year/10-Year Forwards), is sitting below the reported CPI.
Final Thoughts
Stocks enter the best six months of the year in a bullish position. Treasury volatility is falling, reinforcing the case for diversification with bonds. The key driver behind all of this is dampened inflation expectations.
Until that changes, expect more of the same.
Dan Russo, CMT
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