11-5-26 Is the Bond Market Warning of a Stock Crash?

Summary

The hosts discussed a post-election stock rally, the outlook for Treasury yields, and whether widening credit spreads signal deeper market stress. Their central message was that economic growth and inflation matter more for bond yields than the election result itself, while credit spreads and liquidity are worth watching as early-warning indicators.

Markets and corporate earnings

• About 63% of reporting companies had beaten earnings expectations, an unusually strong beat rate. Forward earnings estimates remained elevated, with no major reductions for the next quarter or year.
• Corporate buybacks were expected to resume as the blackout window reopened. The hosts cited about $1.5 trillion in buybacks for the year, describing them as a potential source of equity-market liquidity and buying support.
• Institutional investors had reportedly been net sellers for eight consecutive weeks, particularly in technology. Retail investors had bought equities for eight weeks, including in speculative areas.
• The hosts characterized overall market liquidity as neutral—neither especially tight nor loose, and not yet restrictive.
• After a narrow trading range, stocks rallied following the election. The market moved back above its 100-day moving average but remained below the 20- and 50-day averages after giving back some gains. It had not yet returned to a buy signal.
• On the rally day, growth rose 1.27%, value 1.5%, and core 1.6%. Microsoft gained about 6%, Apple more than 5%, and Amazon about 6%. Berkshire Hathaway rose nearly 4%, JPMorgan about 4%, and Visa more than 3%.
• Consumer discretionary gained about 4.5%; financials and communications rose about 3.5% each; and consumer staples gained about 3.3%.
• Data-center-related stocks weakened amid concerns about slower construction. Caterpillar fell about 5.5%, and Vertiv, Applied Digital, and CoreWeave were also cited as sharply lower. Exxon Mobil fell about 4.5% and Chevron more than 3.5%. One host said the show had taken profits in energy stocks the previous week after the sector became extended.
• The hosts said all reported factors in both the ISM manufacturing and services surveys were in expansionary territory. They viewed this as consistent with continued solid, though not exceptionally strong, growth and saw no clear recession signal in the data they discussed.

Bonds, inflation, and economic policy

• The hosts identified inflation as a major reason yields had risen, citing the effects of the Iran conflict and, to a lesser extent, tariffs. They also pointed to AI data-center investment as a source of pressure, including higher chip prices. Apple was cited as raising prices because of chip costs.
• They argued that slower data-center investment could reduce economic growth and inflationary pressure, potentially putting downward pressure on yields and giving the Federal Reserve more scope to cut rates. An end to the Iran conflict or increased oil supply could also lower oil prices, inflation, and yields.
• The hosts cited historical midterm-election data going back to 1962: yields rose in 9 midterm periods and fell in 7. Among periods with a Republican president and a Democratic Congress, yields fell 3 times and rose 2 times. They concluded that congressional composition alone is not a reliable guide to interest rates.
• A 72% correlation between real wages and interest rates was cited. One host said real wages were falling, reducing the risk of persistently higher inflation and rates in their view.
• Michael Lebowitz said the term premium—which reflects concerns such as deficits, the dollar, and political discord—might add roughly 0.75 to 1.5 percentage points to yields, depending on the model. He argued that easing deficit-related fears could lower that premium.
• The hosts cautioned that election promises may not become policy because of legal, legislative, and political constraints. They advised against treating the initial post-election market move as proof of a lasting trend.

Credit spreads and liquidity risk

• The hosts described credit spreads as a useful warning indicator because they reflect perceived default risk, financial conditions, and liquidity. For example, if an IBM five-year bond yielded 6% while a Treasury yielded 5%, the credit spread would be 1 percentage point.
• CCC-rated bonds, the lowest-quality category discussed, had shown a notable widening in spreads. Single-B and double-B spreads had also begun to rise somewhat, though the broader market was not yet showing major stress. CCC bonds represent a relatively small part of the market, and a few issuers can move that segment.
• Spreads had historically been tight, but their recent movement warranted more frequent monitoring. The hosts cautioned that credit indicators can deteriorate gradually and may be ignored until stress spreads more broadly.
• Lebowitz also cited a modest rise in the cost of borrowing against collateral relative to Fed funds/SOFR as a sign of some liquidity tightening, but not yet a significant problem.

Policy and housing

• The hosts argued that government subsidies, checks, or easier down-payment requirements can boost housing demand and ultimately push prices higher rather than improve affordability. They cited an increase in regulatory costs for building a typical home from about $20,000 to $40,000 over five years.
• They also argued that years of very low interest rates encouraged larger homes and borrowing beyond buyers’ means. They cautioned against expecting policy to fix housing affordability quickly.
• No explicit “not financial advice” disclaimer was stated in the subtitles.

Assets, companies, and instruments mentioned

• Equities: Microsoft (MSFT), Apple (AAPL), Berkshire Hathaway (BRK.B), JPMorgan Chase (JPM), Visa (V), Walmart (WMT), Costco (COST), Amazon (AMZN), Caterpillar (CAT), Exxon Mobil (XOM), Chevron (CVX), Google/Alphabet (GOOGL/GOOG), Meta Platforms (META), Applied Digital (APLD), CoreWeave (CRWV), IBM (IBM), AT&T (T), and Nvidia (NVDA).
• Other market references: S&P 500; Treasury bonds and yields; corporate bonds and credit spreads, including CCC-, B-, and BB-rated debt; oil and gasoline; Fed funds and SOFR.
• Sectors and themes: Technology, AI/data centers, energy, financials, consumer discretionary, consumer staples, communications, housing, and corporate buybacks.

Presenters and sources

Presenters: Lance Roberts and Michael Lebowitz.

Sources mentioned: The Real Investment Show; Michael Lebowitz’s article on credit spreads at Real Investment Advice; the Bull Bear Report newsletter; ISM manufacturing and services surveys; and the historical midterm-election yield analysis discussed on the show.