The stock market is now faster and more aggressive than ever before, which is both good and bad. Because there are now more participants than in previous years and decades, every move and situation is assimilated faster due to the sheer volume of capital and information distribution, leading to opportunities and risks that weren’t present for the previous generation of traders and investors.
Spotting some of these dangers is key for these investors to avoid unnecessary losses and setbacks in their portfolios and wealth creation.
Today’s market activity has created a warning that no one with any kind of exposure to financial markets should ignore. This reasoning is connected to fundamentals and expected behavior in a risk-off environment.
For this to work, investors will have to understand how to connect the dots between the price action in the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) and other asset classes that are considered “safe” or attractive for institutional investors when the risks in the future stack up to be too high, such as the SPDR Gold Shares (NYSEARCA: GLD) in the commodities space.
As investors will see, both of these names are now creating a significant headwind for the SPDR S&P 500 ETF Trust (NYSEARCA: SPY).
What Bonds Represent: The Most Important Indicator
[content-module:CompanyOverview|NASDAQ: TLT]One of the most important drivers of any economy is money itself, its excess or lack thereof, its expensiveness or cheapness. When it comes to bonds, investors have access to a live quote of the current market value through the yield these instruments offer.
Looking at the price action in the iShares 20+ Year Treasury Bond ETF, investors can note a decline of 7.4% over the past 12 months, underperforming the S&P 500 index significantly, but that’s not the most important thing. Bond prices move inversely to their yields. Therefore, this ETF yields up to 4.4%, and here’s what that means.
This yield is a proxy for the cost of money today and, therefore, a proxy for how hard it can be for businesses to deliver on future growth. This yield tells everyone that money has become significantly more expensive than it was just three years ago.
The fact that money is now more expensive has had an impact on the American consumer, as companies in the consumer discretionary sector have already shown signs of weakness, as consumers now see their budgets tightening and credit becoming less accessible.
Recent examples are Lululemon Athletica Inc. (NASDAQ: LULU) and The Gap Inc. (NYSE: GAP), stocks that have dropped by double-digit percentage points during their latest quarterly earnings reports.
Gold’s Performance Signals Appetite For Safety
[content-module:CompanyOverview|NYSEARCA:GLD]Historically, gold has been regarded as the best inflation and volatility hedge in the markets due to its limited supply, which not only helps mitigate the printing of fiat currency but also provides a more straightforward pricing mechanism during volatile markets like today’s.
With ongoing trade tariff negotiations between the United States and other nations, investors perceive too much risk in American bonds and currency, and the same applies to other international assets as well. Therefore, the only sensible approach is to go “risk off” and invest in a commodity like gold.
That theme might explain the 42% rally that the SPDR Gold Shares gold ETF has delivered in just 12 months, signaling an apparent rotation and preference for the benefits that gold can offer during volatile and uncertain markets, such as the one most are experiencing today.
Of course, all of this behavior, in bonds and gold, will eventually affect the S&P 500 and its current valuation.
It All Comes Down to Stocks
Understanding that more expensive money, as seen in bonds, will likely become a headwind in future earnings, valuations in the S&P 500 would have to be adjusted inevitably to reflect this fact. Knowing that this fact occurs in every cycle, investors have been flocking to gold instead, but here’s what really matters.
During the so-called “Liberation Day” of April 2025, when President Trump announced the tariffs to be implemented in the economy, the S&P 500 breached a 20% decline from its 52-week high, throwing it into an official bear market.
Since then, the price has recovered in record time.
However, price, along with volume, has now stalled just shy of its all-time high, meaning that confidence and momentum have not been enough to finalize this upside move. This effectively reflects the recent price action in gold driven by fears caused by bonds.
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