With the first quarter of 2022 over, the U.S. stock and bond markets appear to be conveying drastically different assessments of the growth outlook, leaving investors to decide which view will prevail.
Illustrating the countervailing forces in markets, the CBOE Volatility Index - viewed as a gauge of fear in equity markets - stands not far from its lows of the year, with investors pinning the reversal in stocks on everything from quarter-end rebalancing to buying from retail investors. At the same time, the ICE BofAML MOVE index, which tracks Treasury yield volatility, remains elevated.
Such an inversion is concerning because it has preceded six of the seven recessions since 1978, according to data from Truist Advisory Services. Some investors, however, have given a broad range of reasons why the signal’s predictive power may not apply this time, including the potentially distortive effects of the Fed’s massive COVID-19 stimulus on rates markets.
“We would take this rally as a sort of a gift,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. “If you weren’t able to reduce your exposure to some of the speculative areas of the market before the correction, now is your time.” That’s a sign there is still room for the Fed to shift gears before the market starts to price in a recession, said Gary Cloud, a portfolio manager at Hennessy Funds.
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