“It’s Ludicrous” – The Market Is Losing Faith In Yellen’s Promise

While geopolitical concerns and French election uncertainty are factors, The Wall Street Journal notes that many markets are flashing red on growth as investors begin to return to pre-election bets on the ol ‘new normal’ – a persistently weak economic expansion.

There are clear signs that the sugar rush of Donald Trump’s victory and global-growth hopes has faded, raising doubts among some investors about whether stocks can stay high. The sharp drop in government-bond yields is the most obvious signal that something is amiss.

The long-end of the Treasury market curve has practically dismissed any hope of Trumpflation growth…

And the short-end is decoupling too (showing no faith in The Fed’s policy plans)

And as The Wall Street Journal also notes, this weakness is backed up by ominous signs from raw-materials markets, where copper and iron-ore prices have tumbled…

And a swing in leadership of the stock market away from go-go bank shares and cheap “value” stocks to safety-first utilities, real estate and companies with high-quality balance sheets and reliable earnings. All this has come as inflation expectations priced into bonds have fallen and as some weak data has led to downgrades of economic forecasts.

Not everyone is worried…

Nick Gartside, international chief investment officer for fixed income at J.P. Morgan Asset Management, says there is contradiction between still-high stock prices and tumbling bond yields. But he expects it to be resolved by yields rising and the market again pricing in a faster pace of rate rises by the Federal Reserve, as it did earlier this year.

“It’s ludicrous that the Fed’s priced for only one more rate hike this year,” he said.

But, for now, the weight of evidence is against him…

Vincent Mortier, deputy chief investment officer at Amundi, Europe’s biggest asset manager, says lower bond yields “are saying to us we had better be more cautious on equities.”

Investors have been buying the dips because U.S. profits haven’t been questioned, but he worries that any correction will be brutal. “It can be a big adjustment when people wake up,” Mr. Mortier said.

“The new normal’s still with us,” says Scott Minerd, chief investment officer of Guggenheim Partners. Investors, at least for a time, thought the promise of change that came with Mr. Trump’s election could help break the U.S. economy out of slow-growth mode, Mr. Minerd said.

“So far, we’re long on promise and short on delivery. The market’s waking up to that.”

Rising rates and weak growth are a terrible combination, so investors should take the warnings seriously, and hope that the signs are wrong.