Since then, the Dow Jones Industrial Average DJIA has fallen nearly 4,000 points. The S&P 500 SPX has fallen 8%, even including the latest bounce, while the Nasdaq Composite COMP and the Russell 2000 small-cap index RUT have fallen just over 10%. The so-called Magnificent Seven MAGS group of tech stocks — Apple AAPL, Amazon AMZN, Alphabet GOOG, Meta META, Nvidia NVDA, Microsoft MSFT and Tesla TSLA — has fallen nearly 15%.
Someone who responded to the survey by betting against the fund managers and purchasing the Direxion Daily S&P 500 Bear 3X Shares exchange-traded fund SPXS would have made 30% in a few weeks. Booyah!
The fund managers’ survey is a powerful magnetic south, or contrarian indicator. When these fund managers are overinvested in stocks, it is generally a bearish signal — and vice versa.
The fund managers’ survey is the basis for this column’s regular “Pariah Capital” feature, where we highlight the assets that the big-money investors don’t want and don’t own. These often prove to be terrific investments.
If the next survey shows that fund managers have turned cautious, this offers at least some room for the market to find a floor, even if temporarily. Once the big money has already sold its stocks, it has less room to bail further.
None of this, though, necessarily addresses the longer-term issue.
The S&P 500 index of U.S. stocks currently sells for 20 times the forecast per-share earnings of the next 12 months. Or, to put it another way, for every $100 you invest in the index, you can expect $5 in after-tax earnings over the next 12 months, a 5% yield.
By various other measures, such as those followed by Nobel Prize-winning economist Robert Shiller, the late Nobel laureate James Tobin or legendary stock-market investor Warren Buffett, U.S. stock prices are very expensive compared with history.
Doubtless this is explained by the current completely calm and normal situation.
International markets, such as those tracked by the Europe, Australasia and Far East index, are cheaper. Currently the EAFE index sells for an average of 14 times forecast earnings, equal to a 7% earnings yield.
MAGA conservatives are all acutely aware of what happened to Liz Truss, the U.K.’s MAGA-adjacent prime minister, during her turbulent seven-week administration in 2022. Truss’s government speedily collapsed after it lost control of the bond market, sending prices plummeting and long-term rates skyrocketing. Even though Truss quickly resigned, her political party was eviscerated in the elections two years later.
Trump and Bessent need 10-year U.S. Treasury bond yields BX: TMUBMUSD10Y to come down. That long-term figure is the key interest rate for the entire economy, driving the borrowing rate for corporations and homeowners as well as the federal government. A fall in long-term interest rates will bring down the rates on fixed-rate 30-year mortgages, which may unlock the frozen housing market. It may stimulate domestic economic production and activity. It will mean the U.S. government can service its long-term debts more easily.
Oh, and when U.S. rates come down, that should weaken the dollar, which helps boost economic production and exports and hurts imports. Cutting imports is a key component of Trump’s avowed economic agenda and helps explain his moves to impose tariffs.
It cannot be a positive sign for the administration, therefore, that bond yields have stopped falling in recent days and started rising again. The rate on the 10-year is up to 4.32%, compared with 4.15% earlier this month.
Bonds are like seesaws: If the yield falls, the price rises. So if the administration needs that rate at 4% or below to make Treasury bonds a buy, not a sell.
