To The Moon

Don't fight the cycle when it comes to picking stocks vs bonds...

Here’s an interesting chart ahead of this week’s employment numbers. It shows the US stock/bond ratio (S&P 500 vs Treasuries — both in Total Return terms, and then detrended) vs the US unemployment rate (displayed inverted).

There is a clear and logical link between them: when the unemployment rate is low the economy is doing good, capacity is tight, typically you have high nominal growth, expanding earnings, and rising interest rates. That’s generally good for stocks and bad for bonds.

When the unemployment rate turns and heads higher (well - lower in the chart as it's inverted!), that usually means recession or slowdown, weaker earnings, excess capacity, lower inflation and lower interest rates. That’s typically bad for stocks and good for bonds.

So one takeaway is that if you want to get your active asset allocation weights between stocks vs bonds right, then watch the unemployment rate closely (or at least have a very well-informed view of where it’s heading!).

Another takeaway is markets are currently pricing-in (very)good times ahead. Typically markets will attempt to sniff things out ahead of time, so the optimistic take is that the market is right and the economy is going to stay in expansion, and the labor market will remain tight.

Too optimistic?

Naturally this also means that things could unwind pretty quickly if the unemployment rate does turn the corner — especially given the lopsided valuations within equities, and relative to bonds. This is a time to focus on process and make sure you have the right framework and indicator set to navigate the next steps.

Know the unemployment rate, know the stock/bond ratio. $iShares 20+ Year Treasury Bond ETF(TLT)$ $iShares 7-10 Year Treasury Bond ETF(IEF)$ $S&P 500(.SPX)$ $SPDR S&P 500 ETF Trust(SPY)$

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https://twitter.com/Callum_Thomas/status/1752048819175649441