Since mid-July, the yield on the U.S. 10-year Treasury note has dropped from 4.50% to 4.00%. This decline has benefited bond investors through capital appreciation and has indirectly supported broader financial markets. Although falling yields typically reflect deteriorating economic conditions—such as a softening labor market and signs of slowing growth—the equity markets have continued to rise, defying conventional expectations. Weaker economic fundamentals usually pressure corporate profits, which should weigh on stock valuations. Yet, in the current environment, technical and structural market dynamics appear to be outweighing fundamental concerns.
One key factor is the rising value of collateral. Margin-based trading often uses Treasury securities as collateral. As bond prices increase due to lower yields, the value of this collateral rises, enabling investors to leverage larger positions across various asset classes.
Another driver is passive portfolio rebalancing. Investment strategies that maintain fixed allocations between equities and bonds may automatically sell bonds and purchase stocks when bond values rise disproportionately, thereby injecting capital into equity markets.
Additionally, lower interest rates on margin loans—driven by a reduced Fed Funds rate—decrease the cost of borrowing for leveraged investors. This makes riskier assets more attractive, particularly those that were previously heavily shorted, as their financing costs decline.
In the short term, these mechanisms can sustain bullish momentum. For example, JP Morgan analysts suggest that upcoming economic data, such as September’s nonfarm payrolls and October’s inflation report, could catalyze a further surge in equities—especially if employment rebounds and inflation remains subdued. Combined with strong corporate buybacks and portfolio managers chasing performance, these factors could push major indices toward 7,000 by year-end.
However, such a rally would occur against a backdrop of extreme overbought conditions, as measured by relative strength and historical deviations. These conditions resemble those seen in 2021, which preceded market corrections. While the current upward trend is powerful, the simultaneous overextension across multiple asset classes increases systemic risk.
Recent jobless claims data illustrate the volatility in economic indicators. A spike to 265,000 claims in one week—up from 236,000—raised concerns, but the following week’s drop to 231,000 suggests the increase was likely due to seasonal factors and fraudulent claims in Texas, rather than a broad labor market deterioration. Still, the overall trend in jobless claims has been gradually rising over the past two years.
Thematic portfolios tracked by SimpleVisor show a clear preference for speculative assets. On the day of observation, models focused on small and mid-cap equities and cryptocurrencies outperformed, while conservative, income-oriented strategies lagged. This reflects a broader market sentiment favoring risk-taking.
Ultimately, while favorable market mechanics may prolong the rally, they cannot indefinitely compensate for weakening economic underpinnings. Investors should remain vigilant, as a correction is likely inevitable—though its timing remains uncertain.
— news from Real Investment Advice
— News Original —
Market Mechanics Override Weakening Economic Data
Since the middle of July, UST 10-year yields have fallen from 4.50% to 4.00%. While the yield decline has been profitable for bondholders, it has also aided many other investors. Such a finding may seem counterintuitive, considering that lower yields are the result of a significant weakening in the labor market and a range of other economic indicators suggesting an economic slowdown. Slower economic growth hurts corporate earnings. Thus, the environment should not be favorable for stocks. However, at times, as we see today, the market is willing to overlook potential earnings weakness and let market mechanics take over. Let’s discuss some of those market mechanics. n nCollateral Is More Valuable – Trades on margin are most often collateralized with Treasury securities. As bond yields fall and bond prices rise, the collateral becomes worth more and can thus support a greater number of assets. n nPassive Rebalancing – Portfolios that run a balance of stocks and bonds rebalance on a semi-regular basis. When the value of the bonds rises, the portfolios may need to sell bonds and buy equities if they underperformed. n nLower Margin Costs – A lower Fed Funds rate will result in a lower interest rate on margin loans. Accordingly, lower margin fees make buying assets more attractive. This helps explain why the most shorted stocks, whose trade economics are dependent on margin costs, are leading the rally, as shown in Lance’s tweet below. n nIn the longer run, we may find that the benefits of lower yields and the resulting market mechanics that support risk assets are insufficient to outweigh weakening economic conditions and earnings. However, in the short run, these market mechanics may help some risk assets look past the weakening economic outlook. n nWhat To Watch Today n nEarnings n nNo notable releases today. n nEconomy n nNo notable releases today. n nMarket Trading Update n nIn yesterday’s commentary, we discussed the overbought condition of multiple markets as the flood of money into all asset classes continues. Yesterday, the market continued to rally on the Fed cutting rates by 0.25%, but the primary driver was the advance in both Nvidia (NVDA) and Intel (INTC) surrounding a $5 billion investment in Intel for the development of AI and datacenter chips. Even though the market is trading at the top of its long-term trend and is pushing rather significant deviations from its long-term means, JP Morgan laid out the case as to why the market is likely to “explode” higher in October. To wit: n n“Andrew Tyler said Wednesday’s move [by the Fed] delivered the ‘dovish cut that we were looking for,’ with the Fed mapping out two more to come this year. ‘These insurance cuts are supportive of the bull case, especially in light of [Tuesday’s] retail sales.’ Tyler and his team then raise the possibility of a data-driven push higher for stocks to come, focusing on two reports: September nonfarm payrolls, due Oct. 3, and consumer price inflation for that month, due Oct. 15. n nIf the jobs numbers bounce higher after two consecutive poor reports, and inflation ‘stays contained, look for equities to explode higher after what should be a strong [third-quarter 2025] earnings period. For those looking for 7K by year-end, this is the first part of the formula.’” n nWhile stronger economic data could lift the market’s hope and keep the bullish run alive, the resurgence of stock buybacks, likely better-than-expected earnings results, and portfolio manager buying to “catch up” performance will prove a very bullish combination. As shown, the market has rallied back to the upper trend line after a test of the lower trend line. However, as we saw in 2021, an overshoot above that trend line is possible, and given the current bullish momentum and backdrop, that seems likely, putting 7000 as a reasonable target. If that occurs, the market will be extremely overbought on relative strength and deviation extremes that preceded previous market corrections. n nChanneling my best Yoda, “The force is strong with this bull market, it is.” But as discussed yesterday, the extreme extensions are occurring across multiple asset classes simultaneously, posing investor risk in the future. n nEnjoy the ride, but don’t forget to manage the risk. A correction is coming; only the timing is difficult to predict. n nThe Jobless Claims Rollercoaster n nThe weekly jobless claims data is the most real-time gauge of the labor market. While it can be extremely helpful to assess trends, we must be careful not to read too much into each data point. For instance, last week the number of initial jobless claims was 265k, up from 236k the prior week. That surprise jump made the number the highest since early 2022. The data was concerning, but yesterday we learned that this week’s initial jobless claims were back to 231k, in line with recent levels. There are two predominant reasons for the spike two weeks ago. First, the week included the Labor Day weekend. Holidays often result in more volatile economic data, including jobless claims. Second, there were a large number of fraudulent attempts to collect jobless claims in Texas. Per Axios: n nMinutes after the report, economists flagged that the overall spike in weekly claims was a result of an unusual surge in Texas — a quirk some attributed to holiday effects or the state’s flood disaster claims program. But now the state’s labor office, which reports the data to the national Labor Department, said it was a direct result of fraudulent attempts to collect unemployment benefits. n nThe graph below shows the volatile nature of the weekly jobless claims data. To reiterate, the trend, not the individual weekly data points, is what matters most. As the graph indicates, the trend has remained upward over the last two years. n nSimpleVisor Portfolios n nOn August 1st, we introduced eight new thematic portfolios available for viewing on SimpleVisor and for investment in our new SimpleVisor investment platform. In addition to potentially serving as an investment option for some, they provide a window into the market for SimpleVisor subscribers. For example, the screenshot below shows our core three portfolios followed by the eight thematic portfolios. At the time we took the screenshot, our High Dividend Income and All-Weather portfolios were down. Both of these models are conservative and have good exposure to fixed-income assets, which were trading poorly at the time. Alternatively, highly speculative Small & Midcap Stocks and the Crypto Model were leading the way. Further market insight can be gained by looking at the holdings within each portfolio. n nFor example, as shown in the second screenshot below, approximately two-thirds of the stocks in the small and mid-cap model are up over 2%. At the time, the S&P 500 was up .60%. Thus, only four of the 20 stocks in that model were underperforming the market. Conversely, only two of the 21 stocks in the conservative All-Weather model were beating the market. These two models highlight that the rally yesterday, when we took these snapshots, was heavily a “risk on” speculative rally. n nTweet of the Day n n“Want to achieve better long-term success in managing your portfolio? Here are our 15-trading rules for managing market risks.” n nPlease subscribe to the daily commentary to receive these updates every morning before the opening bell. n nIf you found this blog useful, please send it to someone else, share it on social media, or contact us to set up a meeting.