Wednesday's Market Minute: Investors Must Decide: Blue Pill Or Red Pill?

Financial markets right now are torn between two very different trends, and there may not be much time left for investors to decide which path to take. Take the blue pill, and the cyclical rotation story ends – you wake up in the comfort of your bed and believe whatever you want to believe, assured that central banks will have your back no matter where the economy goes. Yields have no upside risk, and the passive money you’ve dumped into momentum tech and low-volatility factor funds is steadily churning out gains.

Take the red pill, and you stay in a reflationary Wonderland, where bets on an economic acceleration may or may not be founded in reality. Financial, industrial, and energy companies work in your favor as housing numbers set post-recession records and consumer activity reflects an employment situation near the best ever. These dueling realities are evident on a daily basis in financial markets, and the one that wins out depends almost precisely on the direction of U.S. Treasuries.

The momentum-value spread has been directly tied to interest rates, where higher yields mean selling in momentum shares. How long can two wildly different views about the direction of the economy live in harmony? The answer seems to be as long as the bond market’s downside swings remain contained.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Image by Diana Caballero from Pixabay