By: Dave Chenet, CFA, CAIA
|Close||Weekly return||YTD return|
|US Treasury 10yr Yield||3.69%|
Source: YCharts, Yahoo! Finance, WSJ
Market Recap: The Stock Market And The Bond Market Disagree
Stocks and bonds are sending conflicting signals about the economy. While stock markets are anticipating corporate profits to soon break out of their second consecutive quarterly decline, their bond counterparts are taking a much more pessimistic view of future economic growth. Current expectations surrounding profits point to S&P 500 2023 full-year profits of $222/share, roughly unchanged from 2022 and 2024 profits to grow 12%. On the other hand, the bond market anticipates that economic growth will weaken & the Federal Reserve will deem it necessary to reduce short-term interest rates by 1% over the next 12 months.
While bond investors tend to focus on return of capital rather than return on capital and therefore often focus on risk management, they seem to be pricing in the narrative that given Fed rate hikes impact the economy on “long and variable lags”, the full economic impact of tightened monetary policy to control inflation has yet to be fully appreciated. Higher interest rates have already led to stress in the banking sector, reduced borrowing, higher cost of capital, lower inflation-adjusted consumer spending and increased public and private debt. Despite mounting data pointing to impending recession, the labor market remains healthy and will be highly scrutinized by investors and economists in the months to come.
In our view, investors should consider the warning signals being sent by the bond market. Recessions are normal parts of the business cycle and often act to quell asset price bubbles. These periods represent opportunities for disciplined investors who understand their tolerance for volatility and the time horizon for which they are investing. We believe that it is foolish to try to perfectly time the market, but prudent to listen to what the data and market signals are telling us.
What We’re Reading:
Chart of the Week:
Consumer spending has largely been fueled by debt as credit card balances have risen substantially. Combined with the highest credit card rates in over two decades, the narrative of a strong consumer holding up the market may soon change.