Are We There Yet?

Remember taking long family car trips as a kid? Back before in-car DVD players and Bose surround sound systems? When the only way to escape your dad's obsession with Broadway musicals was a tinny Walkman you had to share with your siblings, and your brother forgot the box of tapes, so all you had to listen to, besides Dad's poorly dubbed Evita soundtrack, was the (also, poorly dubbed) soundtrack to Flashdance? And then the air conditioning broke? And the tire on the pop-up camper blew out? And you all had to sleep in the car at a gas station until it opened, because back then, there were no 24-7 credit card swipe machines, and it was 180 miles to the next service station in Utah?

We're reminded of that (somewhat) universal experience of summer hours spent imprisoned in the family car as we wait out this correction. For those who can see recent market activity is not the harbinger of doom but rather prosaically characteristic of a bull market correction, the question is, are we there yet? (Are we there yet? Are we there yet? Are we there yet?)

The answer is: Don't make us pull over this car. We'll get there when we get there. Like all family trips in the Volvo, with steely patience and perhaps some Dramamine, bull market corrections do end eventually. In the meantime, we see an interesting bullish development largely unnoticed by the media. Rates on 3-month T-Bills are falling off a cliff, as noted in this article:

Treasury Bill Yields Fall Most Since 1987 on Money Fund Demand
By Deborah Finestone and Elizabeth Stanton

https://www.bloomberg.com/apps/news?pid=20601087&sid=aXd1ebXsWbjs&refer=home

It's interesting that investors are fleeing commercial paper for the safety of T-bills at exactly the same time the Treasury reduced T-bill sales as a result of record tax revenues from a booming economy. Talk about a disconnect!

We're not sure why the article fails to mention 1998. If you overlay 1998's T-bill rate drop with today's, you see an eerie similarity—rates drop almost the same amount over nearly the same time period as US stocks drop sharply. Just what we're seeing today! What's more, rates spiked down just as 1998's correction was bottoming.

Does that mean we're there? Maybe. Maybe not. Corrections are virtually impossible to time. But it should provide further comfort that this is likely a typical correction, and corrections end. Need more evidence? Another largely unnoticed phenomenon is the widening spread between 3-month T-bills and the effective Fed funds rate. Normally, these two rates trade very closely to one another. We won't know today's official effective Fed funds rate until tomorrow morning (it's a weighted average of today's trades), but the intraday spread as of this writing is 2.32%—the largest since 1996 (a great year for stocks, by the way).

How does this spread happen? A tidal wave of money seeking quality T-bills, driving the price up and yield down relative to Fed funds, i.e., huge amounts of horded liquidity and the exact opposite of a credit crunch! If you're bullish like we are (we hope you are) then you too can envision an awesome ride when that liquidity gets redeployed.

Like correction tops, corrections tend to spike or double-spike bottom. And like the stomach-churning drop, the recovery can be just as dizzying. On the way down, you can have big, deceitfully positive days, as we saw on Friday when the S&P boomed a positive 2.6%. Did that signal the end of the correction? We wouldn't bet on it either way (we wouldn't bet on timing anything about a correction anyway) but market history tells us first, we shouldn't be fooled by a big positive move or even a couple big positive days in midst a correction. And second, we may not be there yet, but we'll get there eventually. The only thing to do is hang on, wait it out, and pray it's your turn for the Walkman next.