Since 1983, here’s the tipping point where bonds spell trouble for stocks

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The eagerly awaited inflation data for August came in weaker than forecast, in what proved to be good news for the bond market but not for a stock market that’s been struggling this month.

That bond yields are so low with inflation north of 5% has helped lift stocks, with the S&P 500 even after its sixth loss in seven sessions, still up 18% this year.

Eddy Elfenbein, the portfolio strategist of the AdvisorShares Focused Equity ETF and editor of the blog Crossing Wall Street, decided to look at the correlation between inflation-adjusted bond yields and stocks.

“If someone says that the stock market is cheap or expensive, naturally you need to ask, compared to what? For judging stocks, the 10-year Treasury yield is a good starting place. The problem with looking at Treasury yields is that inflation can greatly impact them. That’s where [Treasury inflation-protected securities] come in because these bond yields are adjusted for inflation,” he says.

Since 1983, he found that on days when the 10-year TIPS yielded 1.67% of higher, the stock market, as measured by the Wilshire 5000 has had a negative return. But when yields have been zero or lower, the stock market has delivered an average return of more than 38%.

The tipping point appears to be 0.5% — when the yield on the 10-year TIPS is at least 0.5%, the stock market return has been 5.1%; but when it’s lower, the stock market has delivered gains of 23.3%.

The yield on the 10-year TIPS, on Tuesday, was -1.05%, which is close to a record low. “For now, the bond market is signaling more good news for stocks,” said Elfenbein.

The buzz

Chinese President Xi Jinping did not accept an invitation to meet from U.S. President Joe Biden, the Financial Times reported. Biden told a gaggle of White House reporters that the story was not true.

Chinese economic data came in worse than forecast, with retail sales rising just 2.5% year-over-year, its worst showing in 11 months. The U.S. economics calendar includes releases on the New York Fed’s Empire State manufacturing index, import prices and industrial production.

Microsoft said it was hiking its dividend by 11% as it authorized a stock buyback of up to $60 billion.

Las Vegas Sands and Wynn Resorts fell over 7% each in premarket trade on worries over potential regulation in Macau. MGM Resorts also fell sharply.

Coffee chain Dutch Bros and high-performance shoe maker On Holding make their stock-market debuts on Wednesday.

California Gov. Gavin Newsom easily defeated a recall effort.

SpaceX is set to launch four citizens — including Shift4 Payments founder Jared Isaacman — into space.

The market

U.S. stock futures edged higher after the recent string of declines. The yield on the 10-year Treasury slipped to 1.27%.

European wholesale natural gas prices surged, after a large fire at a key electricity converter station shut down a cable bringing power from France to the U.K.

Random reads

Struggling Chinese property developer Evergrande offered parking spaces to its debt holders, who did not accept

Bitcoin billionaires are trying to resurrect woolly mammoths.

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