Warning signs in markets are emerging that should not be ignored, according to veteran market observer Martin Pelletier. With long-term government bond yields rising to levels not seen in over two decades, investors are being reminded of the conditions that preceded the Global Financial Crisis.
Bond Markets Flash Red
Across developed and emerging economies, long-term government bond yields have surged to multi-decade highs, in many cases exceeding peaks reached during the 2008 crisis. United States 10-year and 30-year Treasury yields have returned to levels last seen before the Global Financial Crisis. Japan's long-end bond has hit multi-decade highs, while sovereign yields across Europe and the United Kingdom continue to climb. Even in Canada, where energy exposure provides some offset, long-term rates have moved significantly higher, with 10-year Government of Canada bond yields approaching the upper end of their recent range.
These developments signal that bond markets are pushing back against geopolitical tensions, particularly in Iran and the Strait of Hormuz. While equity markets have largely shrugged off these concerns, the deteriorating situation is reintroducing inflationary pressure at a time when central banks were making progress and leaning toward rate cuts before the latest escalation.
Rising Cost of Money
The result is a bond market demanding greater compensation for long-term lending. Simply put, the cost of money has structurally increased, and it is difficult to see how this does not eventually weigh on growth, with consequences extending beyond bond markets. Governments are facing rising interest expenses on already stretched fiscal positions. Corporations must refinance debt at less attractive levels. Households continue to absorb pressure through higher borrowing costs and elevated living expenses. For many on Main Street, this comes on top of a meaningful erosion in purchasing power following years of aggressive fiscal and monetary stimulus that ran past its useful life.
Technology Sector Layoffs
What is becoming harder to ignore is the pullback in the stronger parts of the equity market. The technology sector, a primary engine of growth, has seen a meaningful reduction in its workforce. Job cuts have mounted into the tens of thousands across the industry. Oracle Corp. has reduced roughly an estimated 20,000 to 30,000 roles, Amazon.com Inc. more than 16,000, and Meta Platforms, Inc. more than 8,000, with further reductions across software, e-commerce, and digital platforms. As the cost of capital rises, management teams are refocusing on efficiency and cost discipline, particularly as they continue to fund significant investments in artificial intelligence.
This shift is not being well received, especially by younger generations. University commencements, once celebratory platforms for technology leaders, have in some instances turned confrontational, with graduates openly challenging executives over the implications of artificial intelligence on future employment. Reduced job prospects, paired with currency debasement and unaffordability, can seem like capitalism is failing an entire generation.
Investor Strategy
This type of market requires thoughtful positioning, a focus on capital protection first, and having the ability to act when dislocations create opportunity. Investors need to protect themselves by being aware of these warning signs and adjusting their portfolios accordingly.
