Blue HavenBonds

Stocks may want to see bonds bottom first

By February 14, 2022 No Comments

Looking for a clue as to when the current sell off in stocks will be over? Watch the bond market. Back in March 2020, it was a bottom in the bond market that helped put a floor under stocks. The bond market bottomed the week of March 16th, 2020 with stocks bottoming the following week (on March 23rd).

Looking back at March 2020

March 2020 is most famous for the fastest drop in stock market history. But the selling wasn’t just restricted to stocks. Bonds, a typical safe-haven during time of stock market stress, were routed as well. AGG, a diversified bond ETF that includes treasury bonds, mortgage-backed securities, and corporate bonds, fell 8% from March 1st, 2020-March 18th, 2020:

This was the fastest and largest drawdown on record at the time. However, AGG bottomed quickly, and by the end of month it was down less than 1% for the period:

This was an extremely important development at the time and helped alleviate concerns of a continued market melt down. The bottom in AGG on March 18th came ahead of a bottom in the S&P 500 (lower panel) the next week on March 23rd:

Looking at the current market

So far in 2022, we’re again seeing downward pressure in the bond market as represented by AGG, which is down nearly 4% year-to-date:

This decline negatively impacts diversified portfolios that are already suffering through year-to-date losses from their stock market allocations. So we’re again watching for a bottom in AGG as a potential leading indicator that the current decline in the S&P 500 is nearing its end. What would a bottom in AGG look like? Watch for a thrust higher (+1% in a single day would qualify) that doesn’t return to its low in the following days.

We will especially take note if the S&P 500 moves below its year-to-date low of 4,222 but AGG does not move under $109. Such a scenario would look like a similar set up to the stock market bottom from March 2020. While no one can predict when or where stocks will bottom, that doesn’t need to stop us from looking for clues. And we believe a bottom in AGG would be a positive for stocks.

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