As Future Fund chief executive Raphael Arndt explained last week at The Australian Financial Reviewthe bond market thinks there’s going to be a recession, and interest rates will fall. But equity markets “don’t seem concerned about anything, which is a concern”.
The US 10-year bond yield has slumped to 3.4 per cent, well below the short-term rate of 5 per cent, while about 1.5 percentage points of rate cuts are priced in from the Federal Reserve, which is actually forecasting a recession – the most widely anticipated in history. Gerard Minack, who sat alongside Dean on an Alpha Live macro panel on Thursday, has a different slant on whether the bond or equity market is calling the market right. He says both markets are doing what they tend to do.
Dymon Asia Capital’s Danny Yong also believes equity markets are far too optimistic in hoping for central banks to pivot to cutting interest rates without having an adverse effect on sharemarket valuations. Beyond Apple and big tech, the broader US sharemarket’s performance has been lacklustre. An equal weight version of the SP 500 for instance is barely positive for the year as small-cap stocks are lagging large caps by some distance.The counterpoint from the bulls is that there are sound reasons to stay long stocks.
Dean says history suggests that’s a sensible trade. “The 1970s showed that you didn’t want to own fixed income, and you certainly didn’t want to own equities during periods of stagflation, but you did want to own those real assets and commodities,” she told Alpha Live.called it “an unresolved tension” between the two markets and suggests they’re working counter to central bank efforts.