Basically it’s not daily noises found in the media that matters, it’s the big things like employment, inflation and productivity, which are surreptitiously expressed in the bond market. Inflation expectations, term premium and the outlook for growth are the broad factors behind bond yields. Ten months ago the specter of recession haunted investors because conventional economic thinking dictates that rampant inflation, combined with tight monetary policy, usually brings an economic downturn, and in turn lower earnings. This did not happen. Instead, inflation moderated, the job market remained strong, and earnings fared much better than was generally assumed. These were the forces that brought about the unloved stock market rally. In point of fact, stock prices have risen sharply since the 2022 selloff. The S&P 500 is now roughly 25% higher than its October low, reflecting gains across all sectors, while the CBOE Volatility Index – Wall Street’s favorite fear gauge – fell well below the historical average.
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By Hubert Marleau
