Stocks and bonds are telling the market two different stories. As WSJ already claimed, the Nasdaq has already entered into a new bull market and indeed we have seen a rather strong rally. The major story behind this bull run is that inflation has peaked, and the Fed will start backing off on interest rates.
Really? If so, we should see the same narrative from the bond market but unfortunately not only is it not validating this idea – it's actually saying the opposite…Let me share some interesting information from my friend.
Here is the 2-year Treasury yield, which is sensitive to Fed Funds Rate expectations.
As you can see the 2-year yield is trading back up to Friday's highs, which means the bond market is anticipating a more hawkish Fed, not less.
So apparently there is divergence between stocks and bonds. Well, who would you rather believe in matters as important as your money? A brash, emotionally-prone person or someone who's objective, calm, cool, and collected? The stock market is emotional, whereas the bond market operates from necessity.
But let's also look at the track record…
While stocks were making new highs last December (right before the crash), interest rates were already telling us a different story: Fed hike expectations were already rising and as a result, tech stocks were already underperforming the S&P 500.
The market acting out of necessity proved right and the emotionally charged market proved wrong.
It's the same thing happening now. This is especially true for tech stocks that are very sensitive to interest rates. If you happen to also believe bonds like me more than stocks in terms of the trending, this is not the time to chase the market, believe me! I suspect we will see some major selloffs pretty soon, even as soon as next week!!
No comments:
Post a Comment