Stocks and bonds are saying two completely different things about the outlook going forward.
Maybe you’ve heard.
The disconnect between long-term yields and record high equities has been debated for months now (even as the risk parity crowd is probably pretty excited about both sides of their portfolio rallying simultaneously), but more recently, the focus has turned to the collapsing curve.
Specifically, a lot of folks think this spells trouble:
Well on Monday, SocGen’s Andrew Lapthorne is out with his latest and he wants you to know that if you’ll just take a quick look under the hood, you’ll discover that in fact, record high benchmarks are misleading and that it’s “bond momentum, not equity momentum, [that you should] watch going forward” …
Clearly the positive mood portrayed by still strong headline equity index numbers is somewhat misleading. Economically, investors are becoming more downbeat, which is reflected in falling yield curves across most regions and an unwinding of the Value versus Quality Stocks outperformance from last year.
This increasing caution is also reflected in equity market positioning, where the sensitivity of a typical cyclical trade (i.e. Value vs Quality again) to changes in the bond yield curve is on the rise. Bond momentum, not equity momentum, is the one to watch going forward.