We Meet Again, Bond

Equity investors often don’t pay enough attention to the bond market. The movement of bond yields is a handy barometer for economic trends and Wall Street sentiment.

Stocks dipped last Wednesday in the wake of the Federal Reserve’s decision to leave the fed funds policy rate unchanged. Despite the Fed’s “pause,” investors were disappointed when Fed Chair Jerome Powell suggested at his press conference that a March rate cut wasn’t on the table.

Whoever happens to be in charge of the Fed dominates our lives. During his latest presser, Powell showed once again that he has a license to kill rallies.

My longstanding contention that the Fed wouldn’t cater to the market’s desire for an early rate cut proved accurate, and Wednesday’s negative stock market reaction shouldn’t have caught you off guard. Fed officials prefer caution over haste, especially someone of Powell’s unflappable temperament.

It’s worth remembering that when he was in the White House, Donald Trump came very close to firing Powell. The Fed leader resisted badgering from Trump to turbocharge the economy by slashing rates, prompting Trump to publicly denounce Powell and his colleagues as “boneheads.” Recent expectations on Wall Street for aggressive easing defy Powell’s historical behavior.

Following Powell’s stay-the-course remarks Wednesday, investors have become more pessimistic that the Federal Open Market Committee (FOMC) will loosen at its next meeting March 19-20. The CME Group’s FedWatch tool currently places the odds of a rate cut in March at only 35.5%; in recent weeks that percentage had been as high as 50%.

What’s significant, though, is that the benchmark 10-year U.S. Treasury yield (TNX) has again dipped below the threshold of 4.0% and hovers below its 50- and 200-day moving averages, which constitutes bullish momentum (see chart, with data as of market close February 1).

It pays to keep an eye on the bond market, which represents a collective wisdom about the future direction of not just bonds but also stocks.

When yields surge, stocks slump… and vice versa. The TNX’s retreat shows that investors anticipate a gradual relaxation of monetary policy throughout the year, creating a supportive environment for financial markets.

My conviction remains that the markets are poised to extend the bull market as the year unfolds.

The main U.S. stock market indices bounced back Thursday and closed higher as follows:

  • DJIA: +0.97%
  • S&P 500: +1.25%
  • NASDAQ: +1.30%
  • Russell 2000: +1.39%

The TNX slipped 2.62% to close at 3.86%. The CBOE Volatility Index, the “fear gauge,” fell 2.65% and hovers at 13.9, far below the dangerous threshold of 20. Helping lift the stock market Thursday were better-than-expected quarterly results from Meta Platforms (NSDQ: META) and Amazon (NSDQ: AMZN).

The balance right now between economic growth and falling inflation is remarkable. Over the past 60 years, the Fed has managed to achieve only one soft landing, in 1994–1995.

We’re seeing hints of emerging softness in the jobs market, which is what the inflation fighters want to see. The ADP private payrolls report, released last Wednesday, showed an increase of 107,000 private sector jobs in January, falling short of consensus expectations and a slowdown from December’s robust 154,000 figure.

This latest ADP report signals a gentle tap on the economic brakes. On the brighter side, the hiring spree in the leisure/hospitality, transportation, and construction sectors paints a rosy picture for overall economic well-being.

Interest rate-sensitive sectors that underperformed in 2023, when bond yields were rising, are positioned to thrive this year as rates come down. These sectors include utilities and real estate investment trusts (REITs). Now’s an opportune time to buy attractively valued stocks in these sectors and rebalance your portfolio.

The housing sector, which has been dampened by rising rates and more expensive mortgages, is set to rebound as well. This dynamic in turn fuels economic growth, because a vibrant housing market makes consumers feel wealthier.

It’s been a good year so far for stock and bond investors, but that doesn’t mean the fraudsters have taken a break.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.