Does the bond market know something that the stock market doesn’t? Or is it the other way around? Or could both be right?
Major stock market indexes rose for the 10th week of the past 12, bringing the S&P 500 (.SPX) and the Nasdaq Composite (.IXIC) to their highest closes since Oct. 9. At the same time, the Treasury market continued on a roll, sending the yield on the benchmark 10-year note below 2.6%, its lowest level since January 2018.
Rising equities are typically associated with a strong economy, while higher bond prices (and lower yields) tend to go with weakening growth. But the most bond-like stock sectors have been doing the best over the past 12 months.
Based on exchange-traded funds, which are how both individuals and institutions invest these days, the Utilities Select Sector SPDR ETF (XLU) had a total return of 20.3% for the 12 months ended on Thursday, according to Bloomberg data. That includes dividends, obviously an important component of these income-oriented equities. Similarly, the Vanguard Real Estate ETF (VNQ), which tracks bond-like real estate investment trusts, returned 18.3% over that span.
By contrast, the SPDR S&P 500 ETF (SPY) returned 4.08% over the latest 12 months, including dividends, while the Technology Select Sector SPDR ETF (XLK), which represents the stocks that have led the market’s recent revival, returned 5.08%.
The strength in utilities reflects the attitude of investors who “don’t really buy the rally,” says Jim Paulsen, chief investment strategist of the Leuthold Group. While they’re skittish, they still want to participate in the stock market rally but opt for its most conservative sector, he adds.
This fear of missing out was apparent in an influx into equity funds, according to Bank of America Merrill Lynch’s strategist team led by Michael Hartnett. Some $14.2 billion flowed into stock funds in the latest week, including $12.1 billion on Tuesday, the most since Sept. 18—the S&P 500’s peak. And the money was coming to America, with domestic inflows at a one-year high at $25.5 billion.
A decline in bond yields doesn’t hurt stocks, Paulsen adds. That lowers the bar that riskier asset have to clear. And the Treasury yield curve implies that short-term rates are expected to stay low. Notes due in three to five years yield less than 2.4%, while the one-year bill yields 2.536%, and the 10-year note yields 2.589%.
At the same time, the multitude of uncertainties that investors face, from the trade negotiations with China and the never-ending Brexit melodrama to difficult comparisons for coming corporate earnings, make a bird in the hand all the more attractive. Especially for those less confident that stocks can surpass their previous peaks.
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