NEW YORK CITY — US stocks have been on a seemingly unstoppable rally. However, the bond market is signalling that this could be over soon.
The Dow Jones Industrial Average closed in record territory on Monday for the 12th straight days — something that hasn’t happened since 1987. Since the election of Donald Trump, the broader S&P 500 has tacked on more than 10% and also climbed to new heights.
The gains have come amid a resurgence in consumer confidence, which hit a 15-year high in February amid President Trump’s promises to cut taxes, roll back regulation, and spend on infrastructure.
And, at first, it seemed the stock and bond markets were in synch. As stocks rallied right after the election, bonds sold off for roughly the same reasons. Yields on the benchmark 10-year Treasury note rose to a high of 2.64% in the middle of December (yields move opposite to prices) — reflecting expectations that the economy would grow faster than it has and that Trump’s infrastructure spending might spur inflation.
But lately — specifically in the month since Trump actually became President — the relationship has started to change. Since the inauguration, stocks have continued to rally, but buyers have also returned to the bond market.
The benchmark 10-year yield has fallen 13 basis points since January 20 and is flirting with its lowest level since the end of November.
Why is this happening?
One reason, according to Capital Economics, is the recent weakness in the US dollar. After topping out at 103.82 on January 3, the US dollar has weakened against a basket of its peers, pulling back into the 100 area. As Capital Economics notes, dollar weakness is “good news for the multinationals that dominate the S&P 500.” Hence, stocks keep rallying.
But the rally in the bond market could be attributed to a different factor, that’s bad for the markets. That can be explained by recent headlines that Trump’s proposed stimulus plans will take longer to implement than previously expected and that the stimulus will be less expansionary than first thought. Put another way — a key aspect of how Trump would goose the economy is likely to fall short of expectations both in terms of its impact on growth and inflation. Capital Economics concludes that it’s “hard to comprehend the latest surge in the stock market.”
Capital Economics isn’t the only one who has taken note of the bond market’s recent strength.
Michael Paulenoff, president of Pattern Analytics, also took note of some signals coming from the bond market. In a blog post on Tuesday, Paulenoff said the ProShares UltraShort 20+ Year Treasury (TBT), an ETF whose price is inversely related to bonds, is “fighting for its technical ‘life’ despite positive economic headlines and a roaring stock market.”
He concludes that TBT is “warning us that something is not quite right with the supposedly strong– and expanding– US economy, and/or that the Trump-aggressive growth agenda is going to be a struggle to implement.”