Bonds Are Bad

The third full week of July saw stocks pull back again with bonds lower too. This has been happening a lot recently, though the first full week in July had strong stocks. Last week, I cautioned on an Energy ETF, XLE.

A Look at the Market

The S&P 500 has returned 8.9% with dividends included, and the price is up 8.4% for SPDR S&P 500 ETF (SPY) in 2026 so far. This leaves the market on track to post a return for the full year below 20%. At the same time, iShares Core US Aggregate Bond ETF (AGG) has declined in price in 2026. With dividends included, the return has been -0.5%, which is negative and well below cash.

Heading into the final week of the month, we are down and falling. Starting at the top, my index, AGG has returned -1.2% during July, while SPY has returned -1.1%. Looking a little deeper, small-cap stocks are down more, with the Russell 2000 (IWM) returning -3.1%. Small-caps are still winning year-to-date, with IWM returning 18.8%, which is more than double the 8.9% return for SPY. Over the past three years, though, SPY is still winning. Looking at the action since the end of 2022, IWM is still behind SPY a lot:

Looking a bit further at market-caps, here are the returns so far in July:

• iShares S&P 100: -0.7%

• SPDR S&P 500: -1.1%

• SPDR MidCap 400 ETF (MDY): -1.7%

• S&P 600 Small-Cap: -2.3%

So, the very largest stocks are doing better than smaller stocks, though this is certainly not the case year-to-date. Plus, this action is very different from the past few years. Typically, the very largest stocks have been rallying and pulling the overall market higher.

I have already discussed here my concern with small-cap stocks (like on June 6th), where it seems like there are buyers of the index but not the stocks. I still prefer smaller stocks to the very largest ones, but with the improvement this view is not as strong.

One of the big stories this year besides the extreme weakness in the very largest stocks, like the Magnificent 7 (two double-digit gainers and the rest up less than 2% with two double-digit decliners), has been the change in the expectations about Fed Funds. It wasn't that long ago that most of the commentary and expectations were for a rate-cut. The FOMC last changed things in December, lowering the range from 3.75-4.00% by 25 basis points to 3.5-3.75%.This was the sixth rate-cut since the Federal Reserve hiked rates to 5.25-5.5% in early 2023. We have a new Federal Reserve Chairman now, and people expected Warsh to cut rates further when his appointment was announced. The current expectations are centered around "no change" in 2026, though some are expecting an increase. This never-ending war with Iran is the challenge right now, as higher oil prices are inflationary.

The FOMC meets this week, and it will share an update on Wednesday afternoon. The consensus is that rates are unchanged. I think the most interesting part will be the discussion about it by the FOMC. I have no expectation for a rate-change this week, or I would certainly share it, but I do remain concerned about the future. I have been discussing the big problem, which is massive federal debt.

I have pointed out that AGG is down in July and year-to-date, and the fixed-income securities in it include mortgages, corporates and Treasury securities. I note that AGG, down 2.4% in price in 2026, while the mortgages are down 2.2% and corporates are down 2.9%. Treasuries have dropped in price by 2.4%, while Agency securities have dropped by 0.6% (due to shorter duration). In other words bonds are falling no matter the type.

When looking at these parts of the market, it is important to understand two things: the duration and the spread. Spreads for corporate bonds are very narrow right now, and this is a factor that could weigh on AGG returns a head if they were to widen. The easiest thing to track is Treasuries by maturity, and here is the current yield curve according to Bloomberg:

.The table shows the sharp increase in rates over the last month as well as over the past year. Using the yields here and comparing them to year-end, here are the changes in rates by constant-maturity:

• 2-Year: +86 bps

• 5-Year: +70 bps

• 10-Year: +51 bps

• 30-Year: +32 bps

So, while stocks are up so far in 2026, bonds are extending their decline that began in 2020, after the spiked up in price as the Federal Reserve cut rates to zero. The total return kind of hides the price declines, as bonds do pay interest. Here is the price action since the end of 2019 for the AGG:

The S&P 500 has returned 129% in price gains since then, and the Russell 2000 has advanced by 76%. When bonds are decreasing in price, few want to hold them. It was a long time ago, but I recall very well in 1987 the falling prices in bonds while stocks were surging still, but then the market crashed in October on "Black Monday". I am not yet predicting a crash, though I am concerned with stocks for a lot of reasons.

I reiterated my Sell rating on BND at Seeking Alpha on May 11th, after initiating it with a Sell in October 2025. The ETF has declined in price since then and has a slightly negative total-return (including the dividends). Things could get a lot worse, and they might not get better. I do like TIPS right now as an alternative, but I like cash too.

ETF Model Portfolio Update

This ETF model portfolio, which is measured against 60% SPY and 40% AGG, is up relative to its benchmark. This week, I did several trades, which were published on here instead of on my Seeking Alpha blog. For those who would like real-time alerts (free of charge for now), just subscribe to the blog.

I posted no articles on ETFs or stocks this week.

Going into the week, my model portfolio equity exposure totaled 28.5%, spread out across two ETFs. Here is what I did this week:

• Wednesday: I exited iShares Bitcoin Trust ETF (IBIT).

• Thursday: I added to iShares TIPS Bond ETF (TIP) and added to PIMCO 15+ Year US TIPS Index ETF (LTPZ).

• Friday: I reduced ProShares S&P MidCap 400 Dividend Aristocrats ETF (REGL).

Here is the current model portfolio, which now has 26.7% equity exposure in two ETFs and fixed income exposure in four ETFs that totals 70.9%:

I have been wrong this year, at least so far, as stocks keep rallying. The rally has been until Friday six weeks ago, when stocks had their worst day of the year. Since then, the S&P 500 has not made a new high, though it sure has tried. Small-caps did again make a new high in early July. Despite being underweight stocks all year, my return relative to the 60/40 index is higher by about 5.2% in just over six months. In fact, while the S&P 500 fell this week and the Aggregate Bond Index fell again too, this model portfolio was unchanged during the week.

The year-to-date strong relative performance is not due to superior returns on my current equity ETFs. My TIPS ETFs have done okay relative to AGG, but they aren't exactly boosting the return. VGSH isn't helping too much either. So, what has it been? I have had positive returns from three ETFs, two of which I no longer hold and one of which is down a lot year-to-date that I just repurchased recently, and there has been some good trading.

How Can I Help You?

I enjoy analyzing ETFs and stocks, and I like sharing my thinking in writing. I am considering starting a subscription service or joining one that is already being published. What things would you as an investor like to see offered?

If you are an investment professional, I would like to work with you as well. I can help educate financial consultants about the ETFs, and I can work with management at investment firms to help create model portfolios or potential ETF investments. Please let me know if your firm would be interested in this.

My ETF articles at Seeking Alpha, written under the alias The Intelligent ETF Investor, share a lot of my ideas.