It’s rarely the direction of interest rates that matters most to markets. It’s the rate of change behind that direction.
Put simply, stocks prefer a quiet bond market. The lower the volatility in rates, the more comfortable investors tend to be across the board.
This afternoon, the Fed is widely expected to cut the fed funds rate by 25 basis points.
The fed funds rate is the overnight rate banks charge each other, and you don’t need to rely on TV chatter or economists’ guesses to know what’s coming.
The fed fund futures market already tells you. The CME’s FedWatch tool makes it easy to see the probabilities of cuts or hikes for every meeting.
The Federal Reserve meets eight times a year, roughly every six weeks.
As of this morning, futures are pricing in about a 90% probability that Chairman Powell announces a 25-basis-point cut today.
We’re Not Banks. We Watch 10s.
If you’re a bank, caring about the fed funds rate makes perfect sense.
But for the rest of us – investors just trying to navigate the chaos – the focus is on the 10-year yield. That’s the real benchmark for interest rates.
Think of the U.S. 10-year as the S&P 500 of the bond market.
And right now, it’s sitting around 4.20%… the exact same level we saw back in October 2022:
Notice how stocks have behaved since then?
We’ve had one of the calmest, least volatile bond markets of my entire career. During that time, the Dow climbed more than 50%, the S&P 500 rallied over 80%, and the Nasdaq surged more than 125%.
All of that happened while the bond market essentially went nowhere.
That’s the point: It’s not so much the direction of rates that stocks care about. It’s the lack of movement.
Stability is what they respond to best.
If You Knew Me Back Then
It’s funny looking back on most of my career.
I’ve always been an equities guy, but it was almost impossible for me to talk about stocks without dragging the bond market into the conversation.
And for good reason: The bond market is massive.
Think of bonds as a young Shaquille O’Neal owning the paint while the stock market is Kobe or Dwyane Wade trying to work around him. Shaq sets the tone whether he’s scoring or not.
But over the past three years, that dynamic disappeared.
The bond market hasn’t moved. It hasn’t mattered. And you’ve barely heard me talk about it.
That’s not my style – it’s just a reflection of how little volatility and influence the bond market has had during this period.
Back in the day, bonds were part of every conversation I had about equities.
Today? I barely check in. Because for now, they simply don’t matter.
That won’t last forever. Bonds are still the dominant asset class. And while they’ve been asleep, stocks have been putting up historic numbers.
At some point, the rate of change in bond yields will wake back up. And when it does, people who forgot how powerful this asset class is are going to feel it.
The bond market is a sleeping giant.
Enjoy the silence… because the next time bonds really start moving, everything else will feel the tremor.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs