Bonds light the way for equities

摘要

Hindsight is 20/20, and a review of recent history shows what went wrong in the stock market redux of the past couple years. This provides powerful clues into how various indicators, particularly the bond market, can provide a better compass to trading during a correction. Bonds spent 2001 waiting for the other shoe to drop, while equity market participants spent the year either trading successfully or getting whip-sawed, a euphemism for trading unsuccessfully. Yet, we can see that bonds predicted the movements in equities. The fixed-income markets experienced a sea change in the spring. They reversed their previously intense bearish outlook and became guardedly optimistic about both the economy and equities. When the bond bear goes into hibernation, as it did during January 2000, it takes investors and consumers along for the nap. The timing of this market change may have been due to concern about the millennium's impact on our computer systems―remember Y2K?―but in any case, we received one heck of a New Year's present. Investors who could take their eyes off their technology portfolios long enough to look at the bond market saw changes in the critical variables in fixed income. These include Federal Reserve policy, corporate bond credit quality spreads and consumer debt levels, just to name a few. A glance at any of the variables depicted in accompanying graphs should confirm how rocky the start to the new millennium has been.