×

The turn of events that could 'destroy everything' for investors

Even as the S&P 500 reaches up to record highs, one strategist is warning that there's a single negative turn of events in global markets that could send stocks reeling.

"A crash in sovereign bonds" is "the one thing that will destroy everything, so that is the one thing we need to be watching," Boris Schlossberg, a macro trader and strategist at BK Asset Management, warned Monday on CNBC's "Power Lunch."

Schlossberg's point is that low bond yields have been a primary driver of high stock prices. As bond yields drop, the fair prices for stocks are often thought to rise, as their future returns can be lower and still look favorable as compared to bonds.

This common relationship becomes even more salient as yields dip to negative territory, as they have in much of the developed world. In the U.S., Treasury yields have only crept up slightly from the all-time lows seen last week.

As long as yields stay low, Schlossberg says there's no reason to think stocks will retreat from their record-setting levels, even as valuations rise amid disappointing earnings.

Indeed, the S&P 500's forward price-earnings ratio is about 17.5, which is above historical norms, and a bit higher than the last time the index was at this level.


This creates a slightly uncomfortable situation in which "we have a huge divergence between fundamentals and technicals," as Schlossberg put it. "For the last five quarters year on year, earnings have been down. But on the technical side, we're at record highs," he said, adding that history shows that record highs have tended to precede yet loftier levels in the months ahead.

Indeed, Piper Jaffray technical analyst Craig Johnson said Monday on "Power Lunch" that "we think there's another 10 percent higher to go between here and year-end," bringing the S&P to his 2,350 target.

"We're seeing this market break out at the all-time new highs, and those that have been negative on this market are going to have to come back and rethink their overall thought process," Johnson warned.

Videos

Trades to Watch

Trader Bios

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more

Connect