A Redux of the 60/40 Stressor is Brewing

2 min read

Oliver Renick

Lead Anchor
For the first time this year, stocks are looking shaky. That’s probably because it’s getting too easy to imagine a repeat of the double-edged bond and stock selloff that crippled markets in 2022 and inflicted max pain per unit of measure for investors.

The recipe for a simultaneous drop in stocks and bonds calls for two simple ingredients: expensive stocks and expensive bonds. Stock valuations aren’t quite as absurd as they were during Covid mania, but they’re getting up there, and relative to yields, they’re very rich. Bonds are looking more disconnected from inflation by the day. Yields are trying to break out higher across the board, and the market is still hoping for interest-rate cuts as inflation heats back up — if CPI isn’t cool today, Treasuries could be in for a reckoning.

Bulls will rightly point out that stocks have been rallying amid higher yields all year, but the situation is changing a bit. For the first few months of 2024, the rise in rates was effectively just a reversion after a plunge from 2023 highs (when the 10-year rate touched 5%). Today, if the 2-year trades through 4.7%, it’ll constitute a technical breakout from an ascending triangle that until now’s stayed contained – and put old highs back within reach.

More importantly, we may be losing the full-throttle A.I. rally that helped offset whatever inflation imperfections appeared in the first quarter. Sideways consolidation after a big runup is a perfectly fine thing, but many momentum trades are now tilting downward. The most important, Nvidia (NVDA), cracked support at $850 on Tuesday before reclaiming the level by the close.

If momentum stocks stall out right when bond traders start thinking about rate hikes more than cuts, we’ve got a bad cocktail.

In addition to the 2-year yield at 4.7% and Nvidia at $850, I'm watching the dollar and bitcoin. If the dollar gets above 105, there’s a good chance we’ll be getting that 60/40 stressor. But if bitcoin can punch through to a new high, it means stocks will likely find a fresh leg too.

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