This Chart Might Surprise Many Stock Bulls

By: Chris Ciovacco | Fri, May 2, 2014
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Jobs Report Means Stronger Growth, Right?

Better or Worse

The economic bulls got a blowout number from Friday's nonfarm payrolls report. From Reuters:

U.S. job growth increased at its fastest pace in more than two years in April, suggesting a sharp rebound in economic activity early in the second quarter. Nonfarm payrolls surged 288,000 last month, the Labor Department said on Friday. That was the largest gain since January 2012 and beat Wall Street's expectations for an increase of 210,000. March and February data were revised to show 36,000 more jobs than previously reported.

Friday's better than expected results seem to align well with the following investment narrative:

  1. Economic improvement.
  2. A more favorable outlook for corporate earnings.
  3. An expectation of rising interest rates.

Since bond prices drop as interest rates rise, we would expect that equities would be handily outperforming their fixed-income brothers in an environment defined by points 1 through 3 above...right? Well, that is not what we have right now. The chart below shows bonds (TLT) have been outperforming stocks (SPY) for some time now.

$TLT:$SPX iShs T-Bnd 20+y/S&P 500 NYSE /INDX + BATS

Blaming Russia Is One Option

The markets are still dealing with a wild card that answers to "Putin". Even as the United States and Germany presented a united front regarding Russian sanctions, the situation in Ukraine continued to take on an unsettling tone. From Bloomberg:

Ukraine sent armored vehicles and artillery to retake Slovyansk, a stronghold for pro-separatist forces, defying President Vladimir Putin's demand to pull back troops with Russia's army massed across the border.

Gold's pop during Friday's session aligned with the TLT is doing well as conflict fears increase theory. That sounds good and has merit, but it does not explain why Treasuries have been outperforming stocks for almost four months now.

Investment Implications

Another plausible theory for the outperformance by Treasuries is that economic confidence is waning. It may be easier to see economically if we flip the ratio to stocks vs. bonds.

SPY:TLT S&P 500 SPDRs/iShs T-Bnd 20+y NYSE/NYSE + BATS

The tweet below puts the current situation into investment perspective:

Ciovacco Tweet: Can stocks go up in low conviction periods?

How do we handle increasing risks? Do we sprint for the equity exits? No, we allocate our portfolios in a manner that offsets our stock positions (SPY) with more defensive-oriented bonds (TLT) and cash. We have had that allocation for several weeks and maintained it into the weekend. If Friday's reaction to what felt like a bullish employment report was surprising to you, keep in mind the markets have been waving yellow flags, as noted earlier this week:

  • Sector Leadership Says What It Says
  • Credit Markets Are Saying Be Careful With Stocks

  • Weekend Conversation

    Weekends are a good time to take a step back from our day-to-day interaction with the markets and ask ourselves:

    What is really important in terms of improving our odds of investment success?

    The video below may get your creative juices flowing or spark a few ideas to improve your approach to the markets.

    Video: Real Conversations (Part 1): Improving Your Probability of Success



    Chris Ciovacco

    Author: Chris Ciovacco

    Chris Ciovacco
    Ciovacco Capital Management

    Chris Ciovacco

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at

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