Warning signs in markets are emerging that should not be ignored

I’ve learned from my many years of being in the market that there are moments when warning signs begin to emerge that should not be ignored.

Across both developed and emerging economies, long-term government bond yields have risen to levels not seen in more than two decades, in many cases exceeding the peaks reached during the global financial crisis. United States 10-year and 30-year Treasury yields are now back at levels last seen before the 2008 crisis. Japan’s long-end bond has surged to multi-decade highs, while sovereign yields across Europe and the United Kingdom continue to grind higher. Even in Canada, where energy exposure offers some offset, long-term rates have moved meaningfully higher, with 10-year Government of Canada bond yields approaching the upper end of their range in recent years.

It doesn’t take a rocket scientist to see that bond markets are starting to push back against what is unfolding in Iran and the Strait of Hormuz. While equity markets have largely shrugged it off, the situation is deteriorating and reintroducing inflationary pressure at a time when central banks were just beginning to make serious progress and were leaning toward rate cuts prior to this latest escalation.

The result is we now have a bond market demanding greater compensation for long-term lending. In simple terms, the cost of money has structurally increased, and it is difficult to see how this does not eventually weigh on growth over time, with consequences extending beyond bond markets.

In particular, governments are now facing rising interest expenses on already very stretched fiscal positions, corporations must refinance debt at less attractive levels and 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 well past its useful life.

What is becoming harder to ignore is what is happening in the stronger parts of the equity market. The technology sector, which had been a primary engine of growth, has seen a meaningful pullback 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 a wide range of companies in 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.

Not surprisingly, this isn’t being well received, especially by our young people. 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. And we can’t blame them, as reduced job prospects paired with currency debasement and unaffordability can seem like capitalism is failing an entire generation.