So far, that’s been anything but a problem.
Both assets rallied to start the year before surprisingly strong hiring data, housing numbers, and retail sales, along with more hawkish Fed commentary, sent Treasuries into a tailspin this month. Stocks, meanwhile, are essentially flat in February, holding onto gains from the second-best January in two decades.
“We’re not bullish on the stickiness of this as we don’t see any type of Fed pivot” from rate hikes in the near term, Nicole Webb, senior vice president and financial advisor at Wealth Enhancement Group, said on Bloomberg’s “What Goes Up” podcast.
That’s not to say cracks aren’t showing in the equity rally. The tech-heavy gauge ended the week with a two-day slump of 2.6%. And the riskiest part of the credit market showed minor signs of distress. Both the iShares iBoxx High Yield Corporate Bond ETF (ticker HYG) and the SPDR Bloomberg High Yield Bond ETF (JNK) declined this week and are each trading below their 50-day moving average lines.
Central bankers are thought to look askance on unbridled equity gains because of their potential to fan consumption and prices. Right now, both stocks and the economy are humming along, normally a welcome pairing. Too much of a good thing could prove a problem should the cycle build on itself, however. Particularly if financial-market resilience comes to be seen as one of the things keeping consumers from reining themselves in.
Stock investors have been betting on a Goldilocks-like scenario, with growth remaining resilient and inflation cooling fast by the second half of the year. Goldman’s Mueller-Glissmann says that’s likely wrong. The bank’s economists say that the Fed can engineer a soft landing, but they also think that to get a handle on inflation, growth has to slow.
“If the Fed has to go further to achieve that, then it will happen. The market is pricing a no-landing—we definitely take the other side on that because it’s a bit too optimistic,” he said.
Goldman recommends a defensive positioning for risky assets, including buying put options and going overweight in cash, while also adopting underweight positions in bonds due to expectations of higher rates.
“The market is mispricing both inflation and rates. The challenge from here is that we are vulnerable to disappointment both on growth and inflation,” he said.