Wednesday's Market Minute: Stocks Vs Bonds: This Time You Have To Choose

A popular way of describing when bonds and stocks rally in unison is that the two asset classes are “telling a different story.” While that may have seemed like a good way to describe the situation at a few important junctures during the last two years, the price correlation between the two asset classes was excusable because the Federal Reserve ultimately stepped in and cut rates. That’s good for stock multiples, and it’s good for bond buyers with another big bond buyer stepping into the mix.

The Fed is the determining factor for whether bonds and stocks are telling the same story or a different one, which makes 2020’s year-to-date action a bit more unusual. Stocks are once again very expensive, and bonds are once again near highs of 2019. So are they telling the same story about rate cuts again? I don’t think so.

Bonds are looking increasingly myopic in their view of central bank action, while the stock market is clamoring for help from the global economy. With bonds pricing in a 50% chance of a rate-cut by June, and at least one (if not more) by the end of the year, the bond market is engaging in selective hearing with regard to Jay Powell and the Fed’s messaging, which yesterday made clear that the central bank is happy with its current stance.

Therefore, bonds are pricing in a worsening coronavirus, bad global data, or something. Stocks on the other hand, do not look too happy about the prospects of a cut. Volatility spiked just as the odds of a cut spiked, and stayed elevated as those odds rose. The most high-beta stocks right now are semiconductors, which depend on the global economy, and earnings overall are expected to grow 10%-15% this year. An economic backdrop in which more cuts are needed is unlikely to make that vision come true.