Just a quick comment on this recent NYT piece that scratches its head about an ongoing, simultaneous rally in both stock and bond prices. “Stock and bond prices are not supposed to rise and fall in tandem,” claims the writer.
Consider the grid below. I don’t have the relative frequencies for each box but I’ve seen them, and while the boxes on the diagonal get fewer hits than the others, my recollection is that periods with price movements in those boxes isn’t that unusual (bond yields move inversely to their prices). But correct me if I’m wrong about that.
|Bond Prices||+||B+, S+||B+, S-|
|–||B-, S+||B-, S-|
The Times piece focuses on the upper left box. In the near term, being there is largely a function of the Fed deciding to pause, mixed with an argument between stock and bond investors. The former expect at least trend growth (maybe not 3% real GDP, but at least 2%), solid corporate profitability, even more share buybacks, and a truce in the trade war with China (Trump’s weekend decision to suspend the start date of higher Chinese tariffs is a point for this team). The latter are more focused on predictions of slower GDP growth; e.g., they may be looking at the Atlanta Fed’s GDPNow estimate for Q4 of 1.9%. And, of course, many of these investors are the same person, buying bonds as a hedge in case the equity market loses the argument.
The next box over (B+, S-) typically signals weak expected growth, leading to an equity sell off and flight to the safety of bonds.
B-, S+, conversely, implies positive growth news (flight from safety), and the other diagonal (B-,S-), implies a Fed that’s more hawkish than it should be from the markets perspective. Equity markets, in particular, have come to disdain a hawkish Fed, in no small part because it is, in recent years, a very unfamiliar creature to them.
Now, consider the intersection of the upper-left box (B+, S+), “secular stagnation” (the notion that without monetary or fiscal stimulus, economies won’t achieve their potential in expansions), and inequality. In a piece I’ve got in today’s WaPo, I note that it took just a pretty small increase in the Fed funds rate and the forthcoming withdrawal of fiscal stimulus (along with a bunch of other stuff, of course, but there’s always other stuff) to significantly downgrade expectations about the strength on the U.S. economy. As I wrote, we’re too much like a bike that cruises along at a decent clip until it hits the slightest hill, and then, without a push, starts to wobble.
Even at low growth, however, corporate profitability has remained solid and boosted equity markets. This, in turn, is a symptom of the weak bargaining clout of labor such that even at low unemployment, workers have a harder time than they should claiming more of the growth they’re helping to generate (to be clear, we’ve definitely started to see some real wage gains; the pressure of full employment still works!). And that’s just another way of talking about inequality.
So, I wonder if part of what we’re seeing when we see a bullish stock market amidst a low, falling bond yields is not just an argument between equities and fixed incomes about the near-term data flow, but a longer-term debate about structurally slow growth and high inequality.