Market Lab Report - Only 3 times in history have stocks and bonds done this

by Dr. Chris Kacher

Softer Fed?

Timiraos was suggesting they will look for reasons to do a 50 instead of a 75 in Dec which fueled a rally on Friday Dec 21, 2022, but this massive bubble still needs to be unwound. 1930-32 and 2000-2002 were massive bubbles that took major avgs down by record amounts: -90% on the Dow Industrials to 1932 low and -78% on the NASDAQ Composite to 2002 low.

Just because the Fed starts to lower rates does not guarantee a major low in the stock markets. For example, this did not occur in early 1930 even after the Fed started to aggressively reduce rates. It took over 2 years for major avgs to find their lows back then. This also happened in the 2000-2002 bear market where the NASDAQ Composite had its largest decline ever of -78% despite the Fed aggressively reducing rates from 6% to 0.75% after overshooting rate hikes due to Y2K fears.

Major yield curve inversion between 3 mo and 10 yr

The 3M-10Y spread flipped negative for the first time since 2020.  The 3M-10Y spread doesn’t flip negative as often as the 2Y-10Y so is an even more accurate indication of an upcoming recession.


Historical returns of stocks and bonds

Interestingly, there have only been three years when both stocks and bonds had negative returns: 1931, 1969, and 2022. 1931 was two years before FDR took the U.S. off the gold standard by making it illegal to hold gold so ordered all Americans to turn in their gold for $20.67/oz. He then repriced gold at $35/oz in 1934, an effective boost to the Fed's balance sheet of nearly 70% which enabled the Fed to increase the money supply. Then 1969 was 2 years before Nixon took the dollar completely off the gold standard where the price of gold had been fixed at $35/oz since it's repricing in 1934. What major adjustments to monetary policy will 2022 bring, and if not this year, perhaps also within the next two years?


Bitcoin bottom?

Some argue that the major low for BTC has been hit because whenever the 30dma hash rate crosses above the 60dma, it has a 100% success rate with a maximum drop from the buy signal of -16%. But this time is different. We have an unusually fast increasing hash rate even though the price of BTC has been in bear all year due to a number of factors. Large mining gear orders that were previously placed during higher BTC prices are actively being shipped and plugged in. There is also the ETH merge which forces some miners to switch to mining BTC. Further, as old rigs become unprofitable, their rack space gets replaced by newer models resulting in a net growth in hash rate.


So it still remains likely that BTC will tank to at least $11k before a major low is found. This will likely coincide with the Fed halting rate hikes. But this is no guarantee of a major low if 1930-32 and 2000-02 are any guides. It's more like "$11k and pray."