COLUMN-The Stock Glass Half Full, Bonds Half Empty: McGeever


(The views expressed here are those of the author, columnist for Reuters.)

By Jamie McGeever

ORLANDO, Fla., Oct.28 (Reuters) – Poor corporate health allows record Wall Street stocks to put a rosy tint to the U.S. economy again – even as their more sober bond market cousins ​​lift a red flag on the same outlook.

Maybe the truth lies somewhere in between, and in a way it always has been: Bull equity and bond managers are paid to be both bullish and gloomy about the same economy that runs outside their windows.

But this week more than most investors to choose a path.

The long end of the US Treasury yield curve has inverted – putting 30-year yields below 10 for the first time since 2019 and below 20 for the first time since this bond made. debuted last year – as data showed the US economy production slowed sharply in the last quarter.

And yet, the S&P 500 has set a new all-time high.

Stock market strategists are looking at swings in growth, inflation, the looming Fed cut, and the likely take-off in interest rates next year. The recent 6% slide in the S&P 500 looks more and more like a blip.

Business cash flow is strong. Some 82% of S&P 500 companies that released third quarter results have so far beat earnings expectations, and revenue growth is offsetting rising costs, with 77% of companies beating revenue expectations .

Profits of S&P 500 companies are expected to rise 37.6% year-on-year in the third quarter, according to data from Refinitiv. That’s down sharply from the second quarter, but second-quarter growth was inflated to all-time highs above 60% by a pandemic low from April to June of last year.

Profit growth is strong even without the favorable base effects, and the outlook remains positive. This helps reduce high price-to-earnings ratios, making stocks cheaper even if the index is near record highs.

After cutting dividends, cutting investments, collecting cash through asset sales, and reducing share buybacks at the height of the pandemic, companies are putting this huge pile of accumulated money to work as the recovery continues.

Morgan Stanley economists estimate that the U.S. economy is experiencing its strongest investment cycle since the 1940s, led by business investment in equipment and intellectual property.

Capital investment could reach its pre-COVID trend perhaps by the end of this year, and real investment growth in the first half of this year was 11.1% on an annualized basis, according to their research.

In many ways, stocks still outperform bonds. There’s a sort of virtuous circle here too: A sluggish bond market depresses long-term returns and makes stocks more attractive, especially big tech, which accounts for more than a fifth of the S&P 500’s market cap.

Stocks can sometimes benefit when growth and bond yields rise, and when both fall.

“It all comes back to TINA – there is no alternative,” says Jon MacKay, senior strategist at Schroders.


But the bond market warnings of a wobbly economy, implicit in the inversion of the yield curve, are getting louder.

Thursday’s figures showed that the US economy grew at an annualized rate of 2.0% over the July-September period. This was down from 6.7% the previous quarter, the slowest in a year, and less than the 2.7% predicted in a Reuters poll of economists.

In fact, removing the 2.1% rise in inventories, the economy actually contracted 0.1%, roughly as predicted by the Fed’s real-time GDPNow forecast. from Atlanta.

The flattening of the yield curve underway for weeks, especially on the long end, accelerated on the announcement.

This inversion occurs in one of the most illiquid parts of the curve. But the inversion remains the inversion and the flattening pressures propagate towards the short end of the curve.

The spread between 10-year and 30-year Treasury bill yields is now 39 basis points, the smallest in two and a half years; the 5s / 30s curve is the flattest since March of last year; and the closely watched 2s / 10s curve flattened by 30 basis points in one week.

For the economy – and Wall Street – a lot now depends on the strength of the American consumer. There are growing fears that inflation may squeeze consumer spending, clouding the outlook for business income and economic growth.

Economics professor and former Bank of England policy maker David Blanchflower and fellow professor Alex Bryson strongly argued in a discussion paper this month that “clear downward movements in consumer expectations “Since May indicate an impending recession, although data on job and wage growth suggests otherwise.

“It seems to us that there is every chance that the United States will enter a recession at the end of 2021”, they conclude.

They recognize this is a bold call. But if the economic temperature continues to drop in winter, it’s only a matter of time before Wall Street feels the cold.

(By Jamie McGeever; Editing by Andrea Ricci)

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