Regime Change (With a Lack of Information)

Two days ago, Bloomberg published this chart within the article, “Bank Stocks Unravel in Worst Rout Since 2020 Amid Economic Woes”:

This text appeared above it:

For some investors and analysts, the slump in bank stocks is particularly confounding as the surge in U.S. Treasury yields, something that would typically help boost shares, is having limited effect.  In fact, while the 10-year Treasury yield is sitting near its highest level since 2018, its 40-day correlation with banking stocks has become the most inverted in three and a half years.

“Banks are historically strongly correlated to bond yields direction, but due to recent growth concerns have opened up a gap with yields,” JPMorgan Chase & Co. strategists including Mislav Matejka wrote in a note.

Here’s a longer look:

Context is everything.  You might draw a different conclusion from this chart than from the previous one.

Furthermore, if we really are at a pivot point of regime change, going back to late 1989 is insufficient.  But that’s all of the history there is on Bloomberg (presumably backfilled from the inception of GICs in 1999).  What did this relationship look like in the seventies?

We’re seeing a lot of correlation charts that involve fixed income these days, and much commentary about them.  At times confusingly so, since some are crafted to show the relationship with interest rates, while others use fixed income returns (producing opposite results).  Without proper context, even professionals can get turned around, to say nothing of lay people.

How about growth versus value?  Here’s the available history on Bloomberg for the Wilshire indexes:

The first thing you’re likely to notice is that extraordinary move during the dot-com boom (and bust).  Then look at the difference in the growth and value relationship by size; quite amazing.

This time we have forty years of data.  What conclusions can we draw?  Should we draw?  Will we draw?

Here’s the big enchilada — inflation and rates — again going back as far as is available (the generic ten-year is the governor of the time horizon here):

As is well advertised across the ecosystem of late, we’ve been in a one-way move in bonds for four decades.  The super-high inflation back then turned to disinflation, propelling a steady move lower in rates.  Now we have that unpleasant spike in inflation at the end — and lots of questions.

Considerations

Given the incredible size and complexity of the modern investment endeavor, we have to continually remind ourselves that we’ve been living in one regime for a long time, and that, despite the wondrous machines on our desks (and in our hands), we might lack the context to evaluate something new.  (Be especially wary of statements about something happening for the first time in history.  Many times it’s just that the view is too narrow.)

There are sources other than the normal ones that we use, providing the opportunity to scramble for some more data, but it’s hit and miss in getting at comparable information.  Plus, composition changes in data series can easily confuse the matter (think of the adjustments to the S&P sectors, for example) and alternative methodologies can result in altered takes (how do the Wilshire indexes used above compare to others formulated in different ways?).

Plus, whether charts are intraday or decades-long, we think we see patterns that may or may not be there — our conclusions can easily be spurious ones.

Whether we’re at a point of regime change or not, it’s good to remember that despite our sophistication, tools, and zettabytes of data, there is a lot that we don’t know and there are important gaps in the information we have available to us.  Being open about those shortcomings is a start.