Who's right about the future? Stock or Bond market?

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Re: Who's right about the future? Stock or Bond market?

Post by macher » Sun May 24, 2020 7:19 am

garlandwhizzer wrote:
Thu May 21, 2020 3:39 pm
Stocks have re-traced over 60+% of their losses in this bear market. Stocks rose almost as quickly as the sudden drastic decline itself. Equity markets are a forward discounting mechanism and it seems to be telling us that in 6 - 12 months both the equity market and the economy are going to be much stronger than today, getting back much closer to "normal." The stock market surge seems IMO to be driven FOMO (fear of missing out) on the next the bull market which some believe has already started. The bond market on the other hand is trading at levels that suggest a very dim view of the economic growth future and little or no inflation for decades.

FED policy can control short term interest rates, but not long term rates. Long term rates are based on bond market investor's perceptions of long term economic growth and long term inflation. The lowest long term rates in history which we have now suggests that bond investors expect very muted economic growth and little or no inflation for multiple decades. The recent and current demand for 30 year Treasuries has driven their rates from low to ridiculously low at present (1.43%), levels that have never been seen before. So equity investors are rushing to get in on the next bull market while bond investors seem to be preparing for what happened to Japan starting in 1990 and lasting 30 years. Who's right?

Perhaps both are to some degree. Bond investors are preparing for a stagnant economic future with possible negative rates while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform bonds long term. Currently the S&P 500 yields more than a half percent higher than the 30 year Treasury and both are considerably lower than their long term average yields. I don't think the fabulous long term backtesting results for a 60/40 portfolio are going to replay quite as well for future expected returns. Hope I'm wrong.

Garland Whizzer
My opinion is the companies that make up the S&P aren't going anywhere especially the top ones.

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