Once upon a time, five blind men discovered an elephant. Each man examined a different part of the elephant and formed a unique impression about the animal. One believed an elephant was like a pillar, while another decided an elephant was like a snake.
In recent weeks, stock and bond markets have been telling different stories, too.
Following a rally on Friday, the Dow Jones Industrial Average finished at a record high for the11th time last week. Reuters reported major U.S. benchmark indices have been driven higher by optimism about tax reform, eased regulation, and increased infrastructure spending.
Both Reuters and Financial Times wrote some investors have become more cautious amidst growing doubts about the pace at which the new administration’s economic policies may be achieved, as well as concerns about the outcome of European elections. These concerns are reflected in the bond market. Barron’s reported:
“The market’s recent advance has taken place on expectations of the reflationary impact of the Trump administration’s policies…the action in global bond markets suggests something else. The 10-year U.S. Treasury yield ended the week at 2.317 percent, the lowest since late November, despite the reflation trade in stocks and expectations of a Fed hike by June, if not May. Even more startling was the slide in the German two-year yield, to minus 0.95 percent, by week’s end, close to a record low, amid growing concern about France’s coming presidential election. While stock investors are smiling at daily Dow records, the bond crowd seems to be hunkering down.”
Who is correct? As with the folk tale about the elephant, both stock and bond markets may be right. Fiscal stimulus could boost economic growth, supporting higher stock values. However, the positive effects of a potential stimulus package are unlikely to be felt before 2018, according to Treasury Secretary Mnuchin. In the meantime, uncertainty about governments and policies at home and abroad may have investors opting for investments they perceive to be lower risk, such as U.S. Treasuries, and that could keep bond yields lower than some had expected.