The bond market looks like a runaway train right now, as more investors clamber aboard to escape the perceived economic boogeyman.
As New York wakes up, the yield on the 10-year U.S. bond is hovering at 15-month lows, yields on equally dated Japanese and German government bonds have pushed further into negative territory, and Australia’s turned negative for the first time in 10 years.
“We fear the things we don’t know, not what everyone is talking about,” says CrackedMarket blogger Jani Ziedins, who believes stock bulls still have the edge and investors may be freaking out over nothing new. Indeed, equities are holding pretty steady for Thursday, as investors keep one eye on trade talks in Beijing and the other on a coming update to fourth-quarter U.S. GDP.
Despite all your best worries, the S&P 500 is about to close out a rock-solid quarter, with a near 12% return set to mark the best three-month performance since March 2012.
There’s more good news (yes, good) for stock bulls in our call of the day, from Ajay Rajadhyaksha, head of macro research and Michael Gavin, head of asset allocation research at Barclays, who expect all this pessimism over the world economy will calm down, driving investors “out of safety and into risk assets, including equities.
“We suspect that such a ‘flight from safety’ will provide a window of opportunity for equity market outperformance and recommend that tactically inclined investors should position for it,” said Rajadhyaksha and Gavin, in a note to clients.
In short, they say it’s “hard to see the attraction of 10y Treasury yields near 2.4% (the current U.S. policy rate), while a mild move higher in yields is all that is required to wipe out the coupon [ rate of interest paid annually] on offer.”
And while cash has been a friend for some, the pair think those camped out in that asset will also be forced into riskier assets such as stocks, due to low returns available in major currency areas, such as the U.S. and even more in Europe and Japan.
Still, they say this equity cheerleading is tough, with the S&P 500 only 4.4% off its September record high. “The asset allocation call would be much easier if equity markets were trading as pessimistically as bond markets seem to be doing. Instead, equities appear to be fairly valued from a fundamental perspective,” said Barclays.
And with a soft patch for earnings growth seen by many this year, gains for stocks will be heavily dependent on further multiple expansion — that is, how much more investors are willing to pay for those companies.
But the Barclays team also sees an “outside chance of a melt-up scenario” for stocks, driven by a stronger fiscal response out of China, a credible trade deal and a calmer political backdrop in Europe along with more stimulus. And they see no U.S. recession, but are keeping an eye out for any soft patch morphing into a “serious downturn.”
Story cited here.