The Disconnect between The Economy And Stocks Is at Record Highs
The comments below are an edited and abridged synopsis of an article by Bloomberg
The bear case for US stocks is getting more compelling. There’s been a deterioration in the macro environment, yet US equities are up. This divergence is unsustainable, but it’s a reminder that bear markets take months to play out.
Amid an intensifying tit-for-tat on trade, it is clear that any deal between the US and China will be difficult to achieve and is by no means imminent.
Economists are reducing their growth projections, but there is still global economic damage to be factored in. Equity strategists remain in denial but eventually they will slash earnings forecasts, making overvalued US stocks seem even more expensive.
The US seems hell-bent on picking a fight with Mexico over tariffs. These will be damaging to US companies if implemented, but harm has been done just by floating the idea after a trade agreement was negotiated and agreed. Policy uncertainty will linger, prompting business owners to hold back capital expenditure and encouraging supply chains to bypass the US.
One reason stock prices are higher: The rates market is now pricing even more exceptional easing, with 2-year yields trading more than 60 basis points below the policy rate. That’s the largest discount since March 2008 and will make it even harder for the Fed to dovishly surprise the market should risk aversion intensify later in the year.
Amid the negative news, the data disappointment has almost been overlooked. JPMorgan’s Global Manufacturing PMI just declined for the 13th consecutive month, dropping into contraction territory. Citibank’s global economic surprise index has been in negative territory for 14 months, a streak unseen in the index’s 16-year history.
The credit market continues to deteriorate, further weighing on equity prices. Bank of America CEO Brian Moynihan is the latest to warn of the potential for carnage from sectors of the corporate debt and leveraged-loan markets.
There is still much downside ahead. Bear markets are always difficult to trade, and bear market rallies can be savage.