Most investors are thinking about how the Fed’s lowering of interest rates will juice the stock market, but they’re missing the bigger picture.
The bond market has been locked in a long-term bear market since February 2021 as higher interest rates and liquidity worries caused the fixed income market to stall.
Since then, the iShares 20+ Year Treasury Bond ETF (TLT) has lost 40% of its value, but that’s set to change.
As a bonus, the shift in sentiment and price activity in the “long bond” means the return of one of the most popular portfolio strategies ever.
Most people think that bonds are boring. And for the most part, they’re right. Until they’re not which is the time to listen.
During the 2007 financial crisis some of the most exciting trades came from the bond market.
The reasons?
First, the bond market is larger than the stock market.
Second, the bond market is primarily made up of institutional money, not retail.
Third, because of that institutional aspect, bond traders take a much longer view of the market forecast than stock traders.
This is why everyone says the bond market represents the smart money.
In 2021 we saw a rollover in the bond market begin in July, six months ahead of the S&P 500’s top. Just one month ahead of the stock market’s failure, the bond market started its precipitous drop.
For those watching, those two moves tipped the stock market’s hand that the bear market was inevitable.
Today we’re facing a mirror image as bonds are emerging from their long-term bear market trend.
Last October, just ahead of stocks, shares of the TLT formed a technical bottom at $80 as the first signs of buying strength formed a trend.
Earlier this year, names like Bill Gross and Jeffrey Gundlach – two titans in the bond market – took to the airwaves to announce the death of the bear market bear.
They were a bit early as they, along with the rest of the market, expected the Fed to start lowering interest rates much sooner.
As a result, much of 2024 has been spent second guessing whether the economy would experience a soft landing and when the Fed would lower rates. Both have a huge influence on the bond market.
August’s close represented the second monthly close above the TLT's 20-month moving average. That puts the TLT in an official long-term bull market trend for the first time since 2021.
In addition, the iShares 20 Plus Year Treasury Bond ETF just crossed above a key psychological price level.
The TLT has been battling with the $100 price since the beginning of 2023.
We’ve seen six months in a row where the $100 level held the TLT back as resistance. The reason is simple, investors like to use round numbers as "navigation points".
The last time that we saw a new bull market like this was in 2018, ahead of a 50% rally in the iShares 20 Plus Year Treasury Bond ETF over a four-year period.
Those returns should be higher this time around as the Fed’s new monetary policy shift will soon target interest rates as low as 2%.
The inverse relationship between bond prices and interest rates means that we’re about to see a jump in bond prices.
Most investors are familiar with the 60/40 portfolio. It’s been a staple of portfolio management for generations of investors
The approach is simple. Allocate 60% of a portfolio to equities and the remaining 40% to bonds. It’s been the definition of a balanced portfolio given its power to reduce risk while returning better-then-average gains.
Late 2022 headlines laid claim to the death of this timeless approach.
The problem, both the bond and stock market falling into the hands of the bears in 2022. Put simply, the media and investors just couldn’t handle the pressure.
But remember, you can’t have diamonds without pressure.
Most investors, including Warren Buffet, know that the best time to buy is when everyone is running for the doors. Well, that’s what happened earlier this year. Now, we’re starting to see a titanic shift in sentiment as analysts are starting to get back on board with the 60/40 portfolio.
Mark my words, any swing in sentiment like this leads to historic opportunities in the market. You just need to know how and where to position yourself for the swing.
Here’s an idea on how you can turn the 60/40 into your long-term friend for years to come as interest rates start coming down in 2024.
More aggressive investors are going to take this opportunity to buy individual bonds, and it’s the right move in my opinion.
Individual bonds will allow you to lock in the higher interest rate “coupons” and position yourself for what could be a historic increase in the value of those bonds as interest rates move lower over the next two years.
The drawback is that this takes time and research.
Most investors will benefit handsomely by allocating funds to the TLT.
The fund has returned 11% over the last year and is likely to accelerate that as the bond trade finds its new bull market pace.
In addition to its capital gains, the TLT shares pay a yield of 3.5%, something that will drive more demand in the coming year as yield hungry investors begin to search for alternatives to the high rates that have been available over the last two years.
