Stocks, Bonds Tell Two Stories; So Who's Right?
Stocks and bonds have been telling two different stories over the past several months, and it appears that the argument for prolonged slower growth is winning.
That, of course, would belong to bond investors, who, rather than fleeing fixed income as many predicted, have stayed in the game as signs accrue that both the U.S. and global economy are far from achieving escape velocity.
It's a position that runs counter to the equity markets, into which investors are pouring money in the belief that this is the year the U.S. will finally shake off the financial crisis that began five years ago and resume its leadership role.
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"They're sending different signals. As to who is right, I would put more faith in the bond market," said David Santschi, CEO at TrimTabs, a research firm that tracks money movements across the markets.
TrimTabs reported Thursday that the first quarter saw a nine-year high of inflows to stock-based equity and exchange-traded funds. The intake of $52 billion contrasted strongly with the $87 billion that flowed out last year, and it came as the Standard & Poor's 500 registered a 9 percent gain.
But equities' gain did not come at the expense of bonds, with fixed-income funds taking in a stunning $65.7 billion, which itself was the highest inflow since the same period in 2006. Those inflows corresponded with bond yields' staying low, despite predictions of the "Great Rotation" between the two asset classes, and indicated that investors remain concerned about global growth.
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"Nobody really has it right necessarily, but bonds typically get it more right, more often," said Kim Rupert, managing director of global fixed-income analysis at Action Economics. "The rally in bonds is a bit overextended, but i do think they're on the right track that things are going to be pretty slow for a while. We're not going to see a real pickup in economic activity anytime soon."
Investors seem to be coming to the same conclusion: Recent data suggest that, despite all the efforts to stimulate the economy, growth is likely to come only in spurts and is subject to disruption.
Employment numbers were soft this week, with jobless claims rising to 385,000 and planned layoffs surging 30 percent from a year ago. Manufacturing metrics have been stalling as well, and companies have been slashing their earnings forecasts.
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As a result, benchmark Treasury yields have returned to late-2012 levels, with the 10-year note falling to 1.76 percent in Thursday trading. The 10-year note often is used as a proxy for bond market sentiment regarding growth.
Should growth continue to weaken, it will take some luster off the rally in stocks, which have been about flat this week after the powerful first quarter.
"At this point, the data's come out weak, but there hasn't been a lot of it—whatever it was got a big reaction," said Jim Paulsen chief market strategist at Wells Capital Management. "If we go weak in the economy the stock market's got downside, but I don't know if there's that much downside in the bond market if we go weak."
Of course, the market always has another major ally if the economy slumps: The Federal Reserve, which has created more than $3 trillion to stimulate growth and hold down interest rates.
Other factors rattling investors this week include signs that the Fed could begin tapering its asset purchases ahead of schedule.
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But if the economy, and in particular the jobs picture, stumbles, the Fed almost certainly will hold course.
"We expect the Fed to stay in the game all of this year," Santschi said. "They talk about their targets, but we think that is really a smokescreen. We don't see how they will be able to stop printing [money]."
Another bit of solace for the stocks crowd is that the market doesn't necessarily depend on a thriving economy, which is good, because strong growth appears some distance off. Economists estimate a solid showing of 3 percent or more for the first quarter to slow considerably through the year.
"I don't know if it's slowed that much in the United States, but you can really tell the sensitivity to it," said Paulsen, who has a bullish take on stocks. "I think it has more to do with people thinking we're going to get a correction, and they don't want to miss it."