Explosive rises in the bond market do not automatically mean that bonds are now in a bull market. This is important to keep in mind, given the impressive rise in the bond market since the October lows. (A proxy for the market, Vanguard's Extended Duration Treasury Index ETF EDV,
It rose more than 30%.
This rally has significantly boosted investor sentiment, with many believing that the 2020-2023 bond bear market is now over.
As you can see from the attached chart, similar-sized rallies have occurred at least two other times since the bond bear market began in the summer of 2020. After the first such rally — from March through December of 2021 — the bear market has resumed with a vengeance, with the Treasury index falling Vanguard's Extended Duration Index ETF gains 50% over the next 10 months. After its second such rally — from October through December 2022 — the ETF fell 34% over the next 10 months.
Just because those two previous rallies turned into bear market rallies doesn't mean the latest one will, of course. But this history reminds us that you cannot conclude from the size of the rally alone that a new bull market has begun.
According to Edward McQuarrie, professor emeritus at Santa Clara University in California: “Terrible bear markets see ferocious bear market rallies… There is every reason to expect [the bond bear-market that began in 2020, which was the worst in U.S. history by several measures] You will, from time to time, be characterized by market rallies of similar strength.
There is also a theoretical basis for doubting that the recent rise automatically means that a new bull market has begun: the future direction of the market at any given time depends not on what happened before but on what happens later. The bond market will only rise in 2024 if things go better than investors currently expect.
Consider current interest rate projections for 2024. The futures market is betting that the federal funds rate will end the year at around 3.75%, according to the Chicago Mercantile Exchange's FedWatch tool, down from 5.33% recently. Because today's bond prices already reflect this expectation, you should not expect the bond market to rise much from current levels if the federal funds rate does nothing more than end the year at 3.75%.
You would expect such a rise only if the federal funds rate fell significantly to 3.75%, while the bear market would be expected to resume if the federal funds rate did not fall that much, or worse, rose from Current levels. .
For this reason, according to Macquarie, “there is no way to know in real time” whether we are currently at the dawn of a bull market or the height of a bear market. If we know what it is, the market will have already moved higher or lower to reflect that knowledge.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to audit them. It can be reached at mark@hulbertatings.com
Read also: Minutes of the meeting show that Fed officials did not rule out further rate hikes
more: Stock market fails to stage 'Santa Claus Rally' off to rough start to 2024
