Financial markets are always trying to set prices now for where the economy and corporate profits are likely to be in the future. And even though readings across the economy are still at eye-popping levels, investors see some areas of concern.
New variants of the coronavirus are threatening to weaken economies around the world. Many of the
So far, investors have largely put aside nervousness — broad measures like the S&P 500 and Nasdaq composite are hitting record highs. Major stock market averages, in fact, have nearly doubled since bottoming in
Still, some sharp moves underneath the stock market’s surface and across other markets show newfound hesitance and anxiety about the potential economic threats. Yields on longer-term
For now, many voices on
But some of those same analysts also acknowledge that the shifting signals in markets may be an inflection point following months of gangbusters performance and raging optimism. The fear isn't that economic growth may slow. It's that any one of threats to the economy will weaken growth too much, too quickly and perhaps even derail the recovery from the pandemic recession and puncture corporate profits.
“We don’t see it stalling out or reversing, but it’s clearly aging,”
Asked why investors would worry about a slowdown when growth rates look so high as to be unsustainable, Weiss suggested that uncertainty can often lead investors to consider a worst-case scenario.
“The unknown of what you’re going to do looms large,” he said. “We’ve been riding this humongous reopening economy and reflation trade. Yes, it’s going to slow down, but what is it going to slow down to? If the job market is still weak, do we slow down to something on the order of 4% to 5%” economic growth, “or does it slow down to 2%? That would be a negative surprise that could roil the bond markets and the stock markets.”
Concerns first emerged earlier this year in the bond market, which has the reputation of being more rational and sober than the stock market.
The yield on the 10-year
The 10-year yield, though, dropped below 1.25% last week. The months-long drop came as investors fell more in line with the Fed’s insistence that high inflation looks to be only temporary. The slide accelerated after a couple of reports that showed economic growth remained strong but not quite as powerful as
The stock market, which had been gliding to record highs, dropped nearly 1% one day last week. The decline was modest but enough to cause some analysts to suggest that stocks were finally paying attention to the signal from the bond market.
Instead, the S&P 500 quickly resumed setting records, the latest on Monday. That’s one of the confounding things for
If the bond market is signaling worries about upcoming economic growth, Joy said, it’s surprising stocks have performed this well. The same goes for “junk” bonds, which are those issued by companies with weak credit ratings. And corporate bonds should be offering more in yields over Treasurys than they are now.
“The bond market historically has often provided a good early warning signal,” Joy said. “I don’t know if that’s the case this time, necessarily, because we don’t really know what’s driving rates down.”
Besides the worries about peak growth and virus variants, analysts point to other possible reasons for declining yields. They include buying of Treasurys by investors from countries where rates are even lower, pension funds shifting some of their investments from stocks into bonds and a rush of traders simultaneously getting out of bets for rates to keep rising.
Though the S&P 500 is close to its all-time high, some market watchers say movements within the stock market have also shown signs of concern. In the past two months, the synchronized moves higher for many areas of the market on flourishing optimism have broken down, say strategists at Deutsche Bank. While big