The stock and bond markets continue to tell very different stories. On Thursday, the 10-year Treasury (^TNX) yield dipped below 2%, to as low as 1.97%, for the first time in almost three years, while the S&P 500 (^GSPC) notched record highs.
The divergence between the stock and bond markets was exacerbated by the Federal Reserve’s dovish tilt in its statement on Wednesday. The Fed acknowledged “muted inflation pressures” and priced in rate cuts for 2020. Though multiple Wall Street banks, including Goldman Sachs, Barclays and Deutsche Bank, expect the Fed to act sooner and cut rates in 2019.
The expectations of a dovish Fed sparks two types of reactions from investors:
Investors plow money into bonds, for fear that the Fed’s support is a signal that the economy is weakening. Bonds act as a safe-haven asset during times of economic duress. This sentiment contributed to the falling 10-year yield as increased demand for bonds pushes yields down. Bond prices and yields move in opposite directions
With bond yields lower, yield hungry investors have no choice but to allocate money into the stock market, hence the new record highs reached Thursday.
It’s this type of playbook that leaves many investors wondering how to view the economic outlook for the near-term.
Yahoo Finance asked three Wall Street experts to weigh in on this dynamic:
“As it relates to the one-handle on U.S. 10-year, global yields have come down rapidly this week. It was inevitable to see pressure on U.S yields while all of the developed countries sovereign debt yields have come under extreme pressure. For example, the German 10-year yield is negative. It’s impossible for U.S. yields to remain elevated in a global marketplace while yields around the globe are crashing. The move in U.S. bonds is probably overdone.” - Art Hogan, chief market strategist, National Securities
“With stocks at all-time highs, investors are operating on pure sentiment. That means psychological levels matter, especially on the world’s benchmark risk-free rate, the 10-year Treasury. Breaking below 2% signals that the markets have begun to price in a recession in the U.S. Trade deal or not, Fed Chair Jerome Powell’s hand will be forced by the data. It’s also telling that the most hawkish house on the Street, Goldman Sachs, flipped their forecast from no rate changes this year to two cuts this year.” - Danielle DiMartino Booth, former Federal Reserve advisor and CEO of Quill Intelligence
“I’m a bit surprised the 10-year yield slipped, since the prospect of lower short-term rates would increase the likelihood of higher inflation down the road, which should drive up the 10-year yield, not down. If there is one consolation, it’s that the 10-yr yield is now below the dividend yield on the S&P 500, which has typically been favorable for equity prices.” -Sam Stovall, chief investment strategist, CFRA Research
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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