It looks like U.S. stocks are giving the Federal Reserve the green light to steer the U.S. economy toward a soft landing. On the other hand, bonds are a sign of bad things to come.
Assets and currencies on the world’s financial markets have been sending mixed signs about where the world and U.S. economies are going. Some investors are confused by the difference, which is adding to the discussion about whether or not the U.S. is about to enter a recession.
Stocks SPX -0.23% have been going up all over the place for the past two weeks. On the other hand, the prices of bonds TLT -1.21% and gold GC00 -1.10% have gone up, while the prices of commodities that are sensitive to the economy, such as crude oil CL00 2.07% and copper HG00 1.00%, have gone down. At the same time, the value of the U.S. dollar DXY 0.43% has dropped, which makes buyers in other countries less sure about the U.S. economy.
In an interview with MarketWatch earlier this week, Bob Elliott, CEO and CIO of Unlimited and a former leader at the hedge fund Bridgewater Associates, talked about these “mixed messages.”
When it comes to longer-term Treasury yields, Elliott said, “the bond market seems to be predicting an economic disaster.” “At the same time, the stock market is expecting the biggest tech boom in more than 100 years,” he said.
To help explain the difference, Tom Essaye, the founder of Sevens Report Research, gave the following explanation.
Investors in stocks are betting that falling bond yields, lower interest rates, and a weakening U.S. dollar will help companies make more money and the economy grow. There is a catch, though: the Fed probably won’t be able to cut rates as sharply as bond buyers think they can unless the economy is really bad. Essaye said that this is why stock investors should think about whether they are missing signs that the economy is getting worse.
“Simply put, stocks are ignoring economic warning signs and are only focused on the Fed sticking the soft landing,” Essaye wrote in a note that was shared with MarketWatch on Thursday. “Other financial assets are telling us growth is much slower than we think.”
Stocks and bonds are more focused on the U.S. economy, but Nathan Thooft, senior portfolio manager of multiasset solutions at Manulife Investment Management, says that signs of slow growth in China and Europe have caused weakening in commodities that are sensitive to the economy, like oil.
There was disagreement among investment managers about which asset was priced too low. Elliott said it’s likely that bond buyers have been too quick to bet on the Fed cutting rates quickly.
Some people said that stocks seemed to show too much confidence about the economy. Ben McMillan, chief investment officer at IDX Advisors, says that since stocks came back from their most recent drop, they have been “priced for perfection.” McMillan said that there will probably be a few more bumps in the road.
On a recent interview with MarketWatch, McMillan talked about stock investors. “I’m not necessarily calling for a recession, but it does seem like the market is pricing in a higher probability of a perfectly soft landing that I just don’t think is warranted.”
There were more hints about the state of the economy for investors on Wednesday, when the minutes from the most recent Fed meeting showed that some top officials were ready to lower interest rates in July.
A preliminary change made by the Labor Department on Wednesday also cut its estimate of how many jobs were added over the past year by about 800,000.
The prices of both stocks and bonds went up because of these numbers. Dow Jones Market Data shows that the yield on the 10-year Treasury note TMUBMUSD10Y 3.877% fell by 4.1 basis points to 3.778% on Wednesday, while the S&P 500 finished higher. Prices go up and bond rates go down, and the other way around.
A clearer picture of the Fed’s long-term plans for rates has been what investors have been looking for. Jen McKeown, chief global economist at Capital Economics, says that people who were looking for an update from Chair Jerome Powell on Friday might have to wait. Powell is going to give a speech at the annual conference of the Kansas City Fed in Jackson Hole, Wyoming.
McKeown said that Powell probably won’t say much new on Friday, other than to say again that the central bank is still “data dependent.”
Instead, investors will need to pay close attention to the data that will be coming out in the next few months to see how the Fed is handling the economic crisis.
Thooft from Manulife said, “So far, the Fed is doing a pretty good job.” “But it’s a very fine line to walk, and things are going to get tougher from here on out.”
