cross purposes
Closing 2024 roughly flat from its post-election level, the normally bullish holiday period brough mild indigestion for the S&P 500 (-2.4% Dec) amid a revolt in the bond market that has seen the 10 Year Treasury yield increase about 1% since the Fed started cutting rates in September (chart).
10 Year Yield Historical Average Around Rate Cuts. Source: Apollo. Click for larger image
A significant conundrum for the Fed, rising rates have put renewed pressure on a financial system already straining under a heavy debt load, working against the aim of monetary authorities by worsening losses on bank balance sheets and ballooning an already bloated federal interest burden.
With the S&P 500 just a few percent below all-time highs, signs of stress in the VIX have so far been minimal and importantly, have not yet shown up in corporate credit spreads, a key measure of systemic risk. With corporate spreads remaining historically low (bullish), for now there appears to be no contagion to the broader financial system.
At such crossroads, conditions can change quickly in either direction. While some bond-friendly data could return markets to their bullish trend, a significant widening in corporate credit spreads combined with an inverted VIX futures curve would indicate that this “healthy correction” risks becoming something more worrisome. Whether riding a bullish wave or defending against a market crisis, we believe tactical hedging is a valuable tool for modern markets.