Are Animal Spirits Running Into a Dumb Money Trap?


For some reason, people are feeling good. Animal spirits are on the run. For one dramatic illustration, if we use the popular (but wildly over-simplistic) definition that any 20% gain is a “bull market,” the NYSE Fang+ index is back in a bull market. The index includes the big hegemonic internet platform companies and has been creamed since peaking late last year, but it has now made up that much room since hitting bottom in May:

On an intra-day basis, the Nasdaq Composite index has also registered a 20% gain from its low, which came in June. Bear markets regularly include deceptive rallies, but this is a forceful advance.

Meanwhile, as tech stocks have surged, bonds continued to show exceptional volatility. During the course of Wednesday’s trading, the benchmark 10-year Treasury yield rose from 2.7% to 2.84% and dropped all the way back again by the end of the day:

The dramatic rise in yields from Tuesday’s trading remained intact, but this takes a lot of explaining. It’s driven by sentiment more than anything else, but how to explain that sentiment? This summary, offered by George Goncalves, head of US macro strategy at MUFG, to my colleagues Ben Purvis and Mike MacKenzie, is plausible:

“Yields rose to levels that looked attractive and the buyers started with the back end and it feels like cash was being put to work in fixed income. There is no sense of a catalyst, but the fact the market can’t hold higher rates suggests there is some skepticism among investors that the Fed will not really deliver on its tough talk.”