Miller Tabak’s Peter Boockvar says that stocks and treasuries are sending mixed signals on the economy. He explains that stocks are bullishly at 11-month highs while Treasuries have remained bearishly strong, with yields still low near June levels.
The Big Picture: Either way, what is most interesting about the markets is the differing opinions on growth that the stock market on one hand is sending and the US Treasury market is on the other.
But the discrepancy between these markets is actually less than it appears, and can be explained by deflationary forces in the economy.
First of all, to understand the outlook that a stock market is pricing-in, one has to look beyond recent performance and think about where it came from. Sure the S&P 500 has hit 11-month highs and rallied strongly from its March lows. Yet it still remains well below where it was in September 2008. Keep in mind September 2008 was a pretty gloomy time for the US. Thus whatever the level of optimism was back in September 2008, we still haven’t returned to it. So it’s hard to argue that current market levels scream bullishness.
Secondly, while treasury yields are low, they have risen substantially from the panic levels of end-2008 when short-term yields went negative and 10-year bonds hit 2.1%. Sure yields are still low by long-term historical standards, even after their increase YTD. Some might imagine that treasuries should price-in more economic-growth-induced inflation or future Fed rate-hikes. Yet this would be to forget about the price deflation we’ve been seeing in US economic data, which could feasibly help keep future inflation in check even if the US is back to growth. In such a scenario current low treasury yields would make sense.
Thus if the US achieves a scenario of mild growth with low-to-no price inflation, then current treasury yields fit with the stock market’s view on the prospects for US economic growth. Now whether these expectations actually play out is another story…
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