The Stock and Bond Markets Can’t Both Be Right

The Stock and Bond Markets Can't Both Be Right

The Stock and Bond Markets Can’t Both Be Right More (Bloomberg Opinion) — The markets for U.S. equities and Treasury securities have diverged since Federal Reserve Chairman Jerome Powell and his fellow policy makers reversed course at the end of 2018 on the need for higher interest rates and the continued reduction in the central bank’s balance sheet assets. The S&P 500 Index has risen 13 percent in 2019 on the idea that the Fed’s dovishness may allow the economy to sidestep a recession. Meanwhile, the yield on the benchmark 10-year Treasury has fallen to below 2.60 percent. Also, the difference between two- and 10-year yields has remained little changed at an unusually tight 15 basis points. Simply put, the optimism seen in equities is not shared by bond traders. Historically, the bond market has had a better record of predicting the economy and, therefore, the divergence has important implications for investor asset allocations. Specifically, recent developments suggest that the start of the next recession may be postponed to 2020 from later this year, and this provides room for further gains in equities. The bond market is signaling, on the other hand, that while the recession may be postponed, the risk has not been eliminated. The widening gap in performance between the two asset classes is traceable to statements from Powell on two occasions at the beginning of the year. Perhaps rattled by the sharp drop in equities in the days following his hawkish comments on Dec. 19, where […]

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