EC Why Doesn’t The Bond Market Believe The Stock Market?

The S&P 500 struggled to gain price traction between the tail end of 2014 and the beginning of November in 2016. For many folks, the period represented 22 taxing months of uncertainty.

Then came Trump. Suddenly, the investing community began soaking up the potential that corporate tax cuts, infrastructure spending and regulatory reform might revive a slow-growing economy. U.S. stocks rocketed to set records. In contrast, bond prices plummeted, as yields for the safer haven securities soared.

Since the beginning of 2017, however, bond investors have been showing that they are less convinced that the federal government can deliver on business-friendly promises. How can one tell? A flatter Treasury bond yield curve.

After the November election, the spread between shorter term 2-year Treasury bond yields and longer-term 10-year Treasury bond yields rose dramatically above 1% (100 basis points). Today? Back down to 0.84%.

In spite of the queasiness expressed by bond believers, stocks have been hitting record highs on bad news and good news alike. In particular, if an economic data point is strong, speculators exclaim that corporations will be more profitable. If the economic data are weak, then speculators fall back on the notion that the Federal Reserve will always abstain from meaningful rate hikes; similarly, global central banks will increase or at least maintain their bloated balance sheets in perpetuity. Good news? Bad news? Everything comes up rosy for stocks.

For whatever reason or reasons, however, the bond market does not believe the stock market. Since March, the 10-year Treasury yield has fallen from 2.6% all the way down to 2.17%. That is lower than it was right after the November election. The 10-year has even dipped below a critical trendline (200-day moving average).