Market Pulse: Stocks, bonds and the economy
The yield on the 10-year Treasury fell to its lowest level since December 2017.
Part of the yield curve inverted with the three-month bill moving above the 10-year note. For some, this is a sign of an approaching recession, though the correlation is not perfect.
At the same time, stocks are strong, rallying 20 percent since the December low. What do the markets say about the economy?
The stock and bond markets are usually the best forecasters. Stock investors must expect a pick-up in the second half or next year. That would explain the market’s surge since Christmas, though there are other possibilities.
Investors have reasons to expect a pick-up. Consumer confidence is strong, which augers well for spending. Surveys of employers show enthusiasm for hiring, both long term and temporary.
Small businesses are increasingly optimistic and that is very important. They, not Fortune 500 companies, are the engines of economic growth.
Bond investors must expect a different environment. They have been buying safe-haven Treasurys and pushing rates down because they don’t see accelerating growth ahead nor inflation. So which side is right — stock investors seeing better days, or the bond crowd that doesn’t?
Ordinarily, the bond crowd (professionals and institutions) is more sophisticated than individual investors. They have driven the yield on the 10-year Treasury down to 2.37 percent today. That’s 2.37 percent before taxes and inflation. No thanks. Individuals see stocks and equity ETFs as far more attractive.
Now the economists: the Atlanta Fed expects the first quarter to be slightly positive (0.34 percent). Essentially, zero growth. The February employment report showed virtually no hiring (plus 20,000 jobs), far below the expected 173,000. Sure seems like growth is slowing, but it’s still growth and other data are somewhat positive. No matter. One quarter does not a trend make, nor for that matter would two.
There is one negative that is not merely potential, it’s real. Global growth is slowing, and even though the U.S. is the strongest economy, GDP growth will slow here as well. Earnings growth also will slow, from 20 percent last year down to 5-7 percent. That is still good.
But after the 20 percent rally the market’s upside will be limited until investors foresee growth accelerating in the months ahead or in 2020. We would see signs of a pick-up six months or more ahead of the economic data that confirm it.
Far-sighted investors will do best. They always do.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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