Real return graph of two-year Treasuries (nominal return minus consumer inflation, white, right price scale) and S&P 500 Index (blue, left scale). Source: Bloomberg
The dynamics of the stock market is highly dependent on the dynamics of real rates, and for the S&P 500 the most important is the yield of two-year Treasuries, writes Bloomberg Intelligence analyst Gina Martin Adams.
“In the last twelve years since the global financial crisis of 2008, the US stock market has been growing steadily, while the real profitability of two-year Treasuries remained below zero,” the expert recalls. “However, as soon as it got positive, the S&P 500 started to slip.”
Today, the real profitability of two-year Treasuries is not only deeply in negative territory (about -1.5%, see the graph above – ProFinance.ru), but is also steadily declining. Therefore, this indicator has a long way to go up before the S&P 500 starts to experience any problems, the analyst concludes.