QE, Deflation, Buybacks Make PKW, SPY, TLT, LQD Top Performers Since 2007 Peak

U.S. Treasury bonds (TLT), U.S. stocks (SPY) and U.S. investment grade bonds (LQD) have been dominating the global markets since the market peaked in 2007. Since 2008, the Federal Reserve's bond buying program (QE), its zero percent interest rate policy, and deflationary pressures in the system caused interest rates to move down (Treasury prices move up), which fueled leveraged stock buybacks with cheap debt.

According to FactSet on December 16, 2014:
For the third quarter, aggregate share buybacks amounted to $143.4 billion. This dollar level reflected a year-over-year increase of 16.0% and a quarter-over-quarter increase of 6.6%. This quarter also marked the fourth highest quarter for spending on buybacks by companies in the S&P 500 since 2005 (when FactSet started tracking the data), trailing only Q3 2007 ($178.7 billion), Q2 2007 ($161.7 billion), and Q1 2014 ($160.4 billion).

On a trailing 12-month basis (TTM), spending on buybacks by S&P 500 companies totaled $567.2 billion. This amount reflected a year-over-year increase of 26.9% compared to the spending over the prior (year-ago) 12-month period. Again, the third quarter reflected the fourth highest quarter for spending on buybacks on a trailing 12-month basis since 2005, behind only Q4 2007 ($618.0 billion), Q3 2007 ($603.3 billion), and Q1 2008 ($593.6 billion).
Source: FactSet

These buybacks helped push up S&P EPS and stock prices during the bull market, which is the reason why PKW, the Buyback Achievers Powershares ETF, outperformed the S&P. But it's interesting that TLT, the 20+ year Treasury bond ETF, also outperformed the S&P since the market's peak in 2007. That's how weird this market has been since the beginning of the previous recession. And look much HYG, the high yield ETF, has lagged LQD, SPY, TLT and PKW.

Source: TradingView.com

Source: TradingView.com

After the S&P 500 peaked in 2007 and 2011, SPY, PKW, TLT and LQD rose while oil (CL), copper (HG) and HYG fell (oil was positive since 2007 until the recent crash). Since 2011, commodities have been selling off because of China's economic slowdown and oil prices crashed recently  because OPEC decided to keep oil output unchanged (read more posts at newsmovingmarkets). China's economy is still slowing and there are risks of deflation and a "long-landing" (or hard landing) ahead, which is why the PBOC cut rates in late November. The crises in Russia and Ukraine and the deflationary pressures in Europe are also making safe haven assets attractive.

Source: TradingView.com
Source: TradingView.com

TLT and SPY's positive relationship won't last forever though. The relationship could get ugly when/if rates start to rise or if oil's crash starts to negatively affect the credit market, risk assets and the U.S. economy. In addition, the divergences between SPY and HYG, TLT and HYG, LQD and HYG, and SPY and CL and HG are not healthy conditions for the overall market. The stock market is starting to look risky again. But to get a sustained 10-20% correction, there first needs to be some wounds on its major uptrend line to weaken the bulls (or more wounds on other indexes).

Here's a related post from October that could help time the next correction:
On October 3, 2014, Sam Stovall, chief equity strategist at S&P Capital IQ, told CNBC that a 5%+ market correction could occur in the first six months of 2015 as the market starts to price in the Fed's initial rate hike, which he believes will occur in the middle of 2015 "at the earliest." (read more)
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