In this interview I talked with Ike Iossif of marketviews.tv about what is happening with the stock market and the bond market. Both have been up this year, but historically that is very unusual and we cannot expect them to continue to do this forever.
So which of these two markets is right and when will it matter to the other one?
This is likely to end up being the single most important question of the stock market today and for financial investors in 2019.
“Over a 4 month period, we have had a 23% rally in equities,” writes Ike, “and a 30% decline in the yield of the 10-year Treasury bond (see chart below). The magnitude of both moves is extraordinary given the short period of time in which they occurred. However, the real issues investors need to be concerned with are these: a) Is the 30% decline in the yield of the 10yr T-Bond just the beginning of a multi-month bigger decline due to an economic slow-down, or, even due to an upcoming recession? b) History has shown that declining rates due to a recession have never prevented the equity markets from experiencing 30%-50% losses, so, why did the SP rally 23%? c) If the fears of a recession are overblown and the rally in equities is the beginning of a new leg to the upside in a bull market, then bond investors are in for a surprise later in the year) If the fears of a recession are not overblown, then equity investors are in for a surprise later in the year!”
In all likelihood, one of these two extraordinary moves of the last 90 days will be proven wrong in the next six months, and either bond investors, or, equity investors will pay the price for the miscalculation. Moreover, if bond investors got it wrong and the yield on the 10yr T-Bond rises above 3.25%, then equity prices may not be able to continue higher
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