Two Sides to Every Story

August 2, 2019  | By Robare & Jones

It has been said there are two sides to every story. Just look at world financial markets. Stock markets and bond markets are telling very different stories.

In the United States, stock markets were blue ribbon winners last week.

The Standard & Poor’s 500 Index rebounded to a record high. The Nasdaq Composite also set a new record. Barron’s reported U.S. stock markets were supported by abundant optimism inspired by expectations for solid earnings growth and a Federal Reserve rate cut in July.

Optimism pushed stocks higher in Europe last week, too. CNBC reported investors were receptive to news suggesting the European Central Bank would ease monetary policy to support the European economy. A significant number of national stock indices in Europe, the Middle East, and Asia finished last week higher, according to Barron’s.

Bond markets have been telling a less optimistic story.

In many regions of the world, bond yields have sunk below zero, and bond buyers have been locking in losses by investing in bonds with negative yields.

In the United States, the 10-year Treasury yield remains positive, but it has dropped from 3.2 percent in November 2018 to 2.1 percent at the end of last week.

So, what are bond markets saying? Barron’s suggested some possibilities:

“…bond buyers locking in subzero yields aren’t doing it, of course, for love of losses. They might think that the certainty of small losses will prove a better deal in the years ahead than whatever stocks provide…There’s something else that negative yields could be telling us. Investors need bonds for things like diversification and setting aside money at known rates to offset known liabilities. For an investor who must buy bonds, a purchase here with negative yields isn’t necessarily a bet against stocks. It could just be a wager that bond yields won’t get much better – that slow growth and meager inflation will loom for many years.”

Time will tell.