Written by Jim Welsh
Correlation between the 10-year Treasury yield and S&P500
Since the end of July (far left on chart below), the correlation between the 10-year Treasury yield and the S&P has been quite high. As the 10-year Treasury yield dropped during August, the S&P 500 fell.
During August the S&P 500 was contained in a range bounded at 2940 and 2825. The S&P 500 broke out above 2940, only after the 10-year yield had started to rise. The S&P 500 peaked at 3021 one day before the 10-year yield topped at 1.90%.
The S&P 500 made a double top on September 19 after the 10-year yield had fallen to 1.75%. As the 10-year yield kept falling, the S&P 500 fell to 2957 on September 24, and tested that support level 3 times before falling below it on October 1. The 10-year yield was down to 1.63% on October 1 but subsequently dropped to 1.51% just as the S&P 500 bottomed at 2855 on October 3, right after the ISM Non-manufacturing number indicated that the service sector had weakened noticeably in September.
Since bottoming on October 3, the S&P 500 has rallied and reached 2953 on October 4. However, the 10-year yield closed at 1.515% on October 4, just barely above the intra-day low on October 3. As you can see, this divergence between the rally in the S&P 500 and the 10-year yield has opened a wide spread. Either the high correlation between the 10-year yield and the S&P 500 has completely broken down, or the 10-year yield is calling into question the validity of the rally in the S&P 500.
In addition the total volume on the NYSE on October 4 was the lightest of the week and well below the volume recorded on Wednesday, when the market fell hard. Heavy volume on a selloff and lighter volume on a rebound is normally not a healthy sign for the market’s trend.
The employment report certainly eased concerns that the economy was falling off a cliff, after the weak ISM reports on Tuesday and Thursday. But the employment report wasn’t strong, as hours worked were unchanged, wage growth fell from 3.2% to 2.9%, and the growth in the number of private sector jobs continued to trend lower.
The market was also given a big boost on October 4 by President Trump who told reporters that “We have a good chance for deal with China.” The S&P 500 promptly rallied 17 points and never looked back. On October 3 and just after the S&P 500 had set the low for the day, President Trump told reporters:
“China’s coming in next week. We’re going to have a meeting with them. We’ll see. But we’re doing very well. I have a lot of options on China. But if they don’t do what we want, we have tremendous power.”
I don’t think there will be a trade deal, and, if correct, the S&P 500 is unlikely to trade above 3,000. One thing we can be sure of is more Tweets telling us how badly China wants to make a deal prior to October 10 when the meetings start. Just as the President did on October 4 and October 3, and every other time the S&P 500 has started to wobble. The 10-year Treasury yield wasn’t as relieved by the mediocre employment report or the President’s comment about trade, which is why the 10-year yield finished the week 0.005% off the low for this week.
