Should We Listen to Stocks or Bonds? - Ahead of Wall Street

Thursday, May 29, 2014

Today's GDP revision report may be nothing more than historical record keeping; after all, it pertains to the long-past first quarter of the year. But it nevertheless spotlights the growing disconnect between the bond and stock markets.

The second look at Q1 GDP shows that the U.S. economy did even worse than was originally estimated. Unlike the +0.1% GDP growth pace that was reported a month back, the economy actually turned negative in Q1, only the second time the U.S. economy has contracted since the start of the current recovery in 2009.

Relative to the first look at Q1 GDP, investments and government spending turned to be even bigger drags on growth, while inventories and net exports turned to be modestly better than initially estimated.

The worrying parts of today's report are housing and business investments. Business spending was weak in Q1, but consensus view is of a strong rebound later this year that gives the recovery greater oomph and staying power. Housing had been steadily improving, but appears to have lost its mojo lately even though interest rates still remain very low.

Nobody is overly concerned about the weak Q1 GDP read, at least the stock market investors aren't. The stock market's sanguine view of the U.S. economic picture has a reasonable basis – the economy was held back in Q1 by temporary factors that have started to ease up already.

Recent data has been showing an improving trend in the U.S. economy's fundamentals, with consensus forecasts putting GDP growth exceeding +3% in the current period and accelerating further in the second half of the year and beyond.

Everyone isn't on the same page when it comes to the U.S. economy's growth outlook. The steady bond market gains that have been pushing yields lower seems to indicate that it isn't as optimistic about the economy's growth prospects. The bond market isn't always right. But is has an overall better track record than the stock market.

Sheraz Mian
Director of Research
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