RenMac’s Jeff deGraaf: There Is Finally an Alternative to Stocks | #657

Jeff deGraaf · Renaissance Macro Research

The S&P 500's free-cash-flow yield now matches real bond yields, so stocks are not cheap relative to bonds.

The S&P's free-cash-flow yield was about 4.5% when the QE-era suppression of real rates began. Today it is about 2 to 2.75% on a real basis, in line with real Treasury yields. He says stocks are by no means cheap and carry far more volatility, while real yields offer a return that is effectively contracted for five to ten years. That makes bonds a real trade-off against equities.

“Today, it's right in line with what you're getting on these real yields, right? So we're about two, two seventy five on a free cash flow basis, real versus real for the equity markets.”at 9:15

Jeff deGraaf · Renaissance Macro Research

Tighter financial conditions favour healthcare, staples and utilities over tech, discretionary and industrials.

Higher real yields tighten financial conditions, which tends to suppress cyclicality. RenMac measures cyclicality by each sector's correlation with forward GDP. Tech, discretionary and industrials have the highest correlations, while healthcare, staples and utilities have the lowest. Higher real yields tend to favour the defensive trio at the expense of the cyclicals. Value has broken out against growth, and higher-quality companies tend to outperform in this regime.

“But the least correlated would be healthcare, staples, and utilities. Higher [real] yields tend to benefit those three areas, particularly at the expense of the previous three.”at 15:09

Jeff deGraaf · Renaissance Macro Research

Equity sentiment has not washed out yet; the washout is likely a 2027 event around July.

Price has done enough damage, but time has not. Sentiment has moved to neutral, not to a washout. Historically these bubble unwinds run about thirteen months, which points to July of next year. The first downward estimate revisions and the ETF outflows and put-buying that follow revisions have not yet appeared, so the process is still in the discussed phase.

“if you were to script it, you know, and look at it historically, it's about a thirteen month window. So that puts us in July of next year.”at 29:00

Jeff deGraaf · Renaissance Macro Research

Current inflation-growth regime is historically the worst for S&P returns; equity exposure not favored.

Renaissance's market cycle clock maps inflation (y-axis) against growth (x-axis), with the S&P versus GDP as the dependent variable. The market is in a very high-inflation zone, the top third back to the mid-1940s, with growth around the 60-65% level. Within the nine-quadrant framework, that zone has the worst historical annualized S&P return of any zone, positive by only about 40 basis points. Jeff says this would not support an equity call on fundamentals alone. He notes the zone is also where real rates are high, and that energy and healthcare have worked while materials and discretionary names have not. The technicals keep the trend-following process from selling on the regime alone, but the regime tightens the trigger levels.

“We find that the historical annualized return for the S and P in this zone is the worst of any. Now, the good news is it's still positive but it's only positive by like 40 basis points or something.”at 37:55

Jeff deGraaf · Renaissance Macro Research

November is historically the strongest month, about 77% positive with a 2.6% average return.

Jeff cites seasonality: November has become the best month on a probabilistic basis, with about a 77% historical chance of positive returns and an average return near 2.6%, roughly three times a normal month. This tactically supports the market into year-end. Structurally, though, the regime and credit indicators argue against being as broadly optimistic as consensus has been in 2026. His stance is to play it and watch for natural points of resistance where a rally should fail.

“November actually has become the best month from a probabilistic standpoint, about a 77% chance historically of probable positive returns with about a two sixty basis point return”at 42:53

Jeff deGraaf · Renaissance Macro Research

Real yields above 2% give investors a real alternative to stocks, with bonds competing for the same return.

Real yields (nominal yields minus inflation expectations) are in the high 2s, about 2.65% today versus 2.90% when the piece was written. Above 2% this resembles the 1873 John Bull era, when investors looked for return once safe yields disappointed. A 65/35 portfolio with about 5% nominal and about 2.6% real yield can approximate the 7% target that used to require an 80/15 stock-bond mix, with less volatility. Locked-in real yield gives a contractual return for five to ten years, and real yields provide ballast to rebalance into stocks after a 15-20% correction. He expects a gradual shift, not a thunderclap, because investors have not yet shown frustration with equity returns.

“I don't need a eighty fifteen allocation to stocks versus bonds to get the same kind of 7% target return. I can have something that's more normalized like a sixty five thirty five portfolio with a 5% nominal and a 2.6% real yield”at 3:41

Jeff deGraaf · Renaissance Macro Research

Current regime is consistent with higher back-end yields, a flatter curve and higher real rates.

In Renaissance's market cycle clock, the high-inflation, top-third-growth zone is consistent with higher rates on the back end of the curve, a flattening curve and higher real rates. Jeff says these conditions are all in play now. The regime also helps explain why high real rates are matching the poor equity returns in that zone. Real rates above 2% are central to his framework, since they make bonds an alternative to stocks.

“the market cycle clock where it is, which is consistent with higher rates on the back end, a a flattening curve, higher real rates, like all these things are playing.”at 39:31

Jeff deGraaf · Renaissance Macro Research

Credit stress is spreading from CCCs into the broader corporate bond market as spreads widen.

CCC spreads are around 1,200bp, but the median is far lower, so about four or five issuers drive the stress. The share of names trading below 80 cents on the dollar, his line between good and shaky credit, is about 7% and expanding. Double-B spreads are about 196bp, near his 200bp trigger for deterioration. Tighter financial conditions are showing up in corporate spreads, which is the next step after real yields rise.

“The double b's are right at the threshold of a trigger for us. We look for basically a 200 basis point spread as kind of a, hey, things are deteriorating. We're at about one ninety six here. So we're starting to see it infiltrate into the corporate market.”at 13:59

Jeff deGraaf · Renaissance Macro Research

Public credit stress is building slowly, with the share of triple-C bonds below 80 of par rising.

Jeff's public-market gauge for credit stress is the triple-C segment, where a small share of bonds (about 25%) accounts for most of the problem. He tracks the percentage of those bonds trading below 80% of par. That share is building, slowly but steadily. He concludes the market has not yet crested the hill, so the credit cycle is still moving toward a peak. Once a stress build passes that peak, it becomes much harder to reverse.

“We'll look for the percentage that are below 80% of par, right, and if that's building out, which it is, it's slow, but it's building out”at 50:46

Jeff deGraaf · Renaissance Macro Research

Rising real yields are tightening financial conditions, with the market doing some of the Fed's tightening.

Higher real rates are a tightening of financial conditions. That tightening filters into credit quality and corporate spreads, and then into sector leadership. The market is doing some of the tightening for the Fed, which is expected to consider rate hikes. Whether the Fed goes further remains open.

“So, you know, it is a tightening of financial conditions. We're finally there. ... But the market's doing some of that bidding for them right here, which I think is important.”at 15:48

Jeff deGraaf · Renaissance Macro Research

Hyperscaler bonds are showing rising credit concern, with a third trading at their two-year wides.

The hyperscalers sit in the elevated-spread cohort that is driving triple-C stress. Spreads above about 1,000bp are an uncomfortable zone, and about a third of hyperscaler bonds are trading at their widest levels in two years. He reads this as concern about AI infrastructure financing, and the credit market is allocating capital on price and return as it should.

“But a third, I've got the data right here, a third of the hyperscalers are trading their widest over the last two years.”at 18:32

Jeff deGraaf · Renaissance Macro Research

Bond market will adjudicate fiscal plans; term premium reflects supply crowding and fiscal distrust.

The term premium is rising because the Treasury now competes with heavy debt issuance from Google and Meta, which causes crowding out. Investors may also distrust the fiscal situation and expect a flood of supply, so they demand more. The bond market will be the final judge of both parties' fiscal plans, and this is happening globally.

“No politician, R or D should have the ability to just wave a magic wand and get things done. At some point, have to answer to somebody and if it's not gonna be Congress, then it'll be the Treasury having to go out and sell those bonds.”at 19:05

Jeff deGraaf · Renaissance Macro Research

Prediction-market odds show markets have priced a shift in the Senate and a likely regulatory change.

Kalshi odds for Republicans holding the Senate fell from about 60% to 40% over the summer. By the Sunday before the election the market had a blue wave taking both houses at 70%. Markets already price all available data, so the regulatory environment has moved since May and June, when the market was focused on compute and financing.

“the probability of the Republicans holding the Senate started going from something that was close to 60%, continued to deteriorate down to 40%.”at 25:06

Jeff deGraaf · Renaissance Macro Research

Semiconductors triggered a bubble signal in April, peaked in June, and are now unwinding; step aside.

A bubble signal fires when an index doubles within two years from an all-time high, and semis triggered it in April. Historically, after the trigger the next three months were higher about 80% of the time, and six months out it was roughly a coin flip with the index already rolling over. Semis peaked on June 22 after about two months. Momentum and the bubble indicator led RenMac to step aside and sell into the decline. Earnings revisions are not yet falling, but in the SOX of 2000 the index was down 40% by the first downward estimate revision, so revisions will likely deteriorate once the cracks widen.

“We see it through the price performance of momentum, and we see it through our bubble indicator. And those two things really tipped us off that said, hey, you know what? We're gonna step aside and be really willing to shoot them in the back as they crack”at 26:58

Jeff deGraaf · Renaissance Macro Research

Gold's bubble signal already unwound; damage is largely done and interest has faded.

Gold triggered RenMac's bubble signal in October a year ago. It rose for three months, cracked in January, and has been ignored since. Price has returned to the level where the bubble signal began, and outflows are appearing without yet being extreme. He thinks most of the damage is done, so he would watch for a breakout as the sign that the cleanse is over.

“Gold triggered actually a year ago in October for us and almost perfect to script, right? The next three months it went up, it cracked in January and nobody's cared ever since.”at 30:57

Jeff deGraaf · Renaissance Macro Research

Crypto may be an early bullish trend change; trends positive but follow-through still lacking.

After Treasury Secretary Bessent talked about twisting the curve by buying back-end securities to tighten conditions, gold and crypto both rallied. Gold gave all of it back, but crypto held its gains, which Jeff found interesting. The trends are positive, though there has been little follow-through since. He calls it an early, potentially burgeoning bullish trend change that his team is watching closely. He says he is not philosophically bullish or bearish and simply trades trends.

“And you had both gold and crypto rally. Gold gave it all back. Crypto didn't, which was interesting.”at 42:35

Jeff deGraaf · Renaissance Macro Research

Private credit is deteriorating in a stable, slow way; the credit cycle is turning and hasn't crested yet.

Private credit grew after Dodd-Frank pushed banks out of lending, and that rapid growth led lenders to loosen standards: covenant-lite deals, weaker collateral and fraud-like cases such as First Brands. Much of the book is floating-rate paper struck in the zero-rate SPAC era, so rising real rates are making payments harder. Strain shows up in gates: investors requesting 7-12% redemptions were capped at about 5%, which Jeff reads as a liquidity problem that can become solvency. Payment-in-kind and pretend-and-extend are also spreading. Stress is visible in BDC and private equity ETFs. Jeff says it is not systemic or recessionary, but a festering problem that is stably deteriorating. He has not seen the peak yet, and a refinancing wall around 2029 plus resets from 3-5% to about 10% rates could make it worse.

“And right now, seems to be stably deteriorating is the way I would put it.”at 49:47

Jeff deGraaf · Renaissance Macro Research

The business cycle is starting to turn, but AI spending has kept it going longer than expected.

Jeff sees a series of indicators pointing to a business-cycle turn that began slowly. He says the turn has been slow to develop mainly because AI investment has kept activity going. He is watching how long that support lasts. This is a slow-moving deterioration rather than a sudden recession call.

“I think the business cycle is starting to turn or trying to turn and it's been slow in the making, mostly because AI has kept it going.”at 49:56

Jeff deGraaf · Renaissance Macro Research

Software credit is under pressure because AI makes many software businesses existentially at risk.

Jeff points to the so-called SaaSpocalypse as a reason private credit is under strain: much of the lending was made to software names. Pressure on those companies is not only about slower growth, but about whether they are still needed at all when code can be produced quickly with AI tools. That turns a cash-flow risk into a question of existence, which is why software loans are weakening.

“we've seen it with the SaaSpocalypse and a lot of that credit was based in the software names. That's one of the reasons why they were under such pressure because not only was there risk of the business slowing down, but it actually became existential.”at 51:45