Stocks vs. Bonds…Who’s Right?
U.S. stocks continue to trend higher, indicating investor optimism about economic growth, while a flat/inverted yield curve has tended to herald a weakening economy—the truth may be somewhere in between.
Mixed economic data continues into the second quarter, and earnings season has just begun. A negative quarter for S&P 500 earnings is expected, but it’s not only whether the bar has been set too low that will be important—but what the tone of the forward looking commentary suggests about the broader economic outlook.
An international economic barometer is approaching a historically critical level, while Brexit drama is extended.
Listen to the latest audio Schwab Market Perspective.
“Creativity comes from a conflict of ideas.”
― Donatella Versace
Conflicting opinions are what makes markets work—you believe the price of a stock is going higher, while we think it’s not, we sell to you—but there appears to be a fairly large difference in opinion this year between stock and bond investors. Stocks have had a remarkable run since the Christmas Eve 2018 low, and have easily overcome a few bumps in the road, suggesting that stocks are telling a story of a near-term economic soft landing and a recovery shortly thereafter.
Stocks indicate confidence…
The bond market appears to be telling a much different story. The yield curve has flattened substantially, even inverting recently (with the 10-year Treasury yield moving below the 3-month T-bill yield). Theoretically, this could at least partially indicate a lack of confidence in future growth prospects. If investors are willing to have their money tied up for ten years at ever lower rates, the confidence in future economic growth is likely not particularly strong.
…but bonds appear to be telling a different story.