Which Has It Right, the Stock Market or the Bond Market?
Since the beginning of the year, bonds have risen at the same time that equities have continued to gain.
Immediately after the election, U.S. government bonds got crushed. Meanwhile, stocks rallied as both asset classes reacted to the potential for higher growth and higher inflation. However, since the beginning of the year, bonds have risen and interest rates declined; at the same time, equities continued to gain, a highly unusual state of affairs. Since the beginning of the year, government bonds are up about 2.5% and U.S. equities are up almost 10%. It would appear that equities are anticipating improving economic and profit growth while the bond market is fearing the worst.
This week's economic data could support either conclusion. Month-to-month data continued to look terrible across the board. Falling industrial production, another bout of deflation, declining housing permits, and falling retail sales all turned up in this week's data, topping off anemic employment numbers, motor vehicle data, and construction statistics. Year-over-year, averaged data was much more benign, not showing much change from previous levels of modest but uninspiring growth.