Stock Market Looks Smarter Than Bond Market This TimeMichael P. Regan
The big question in Cleveland these days may be how to deal with the rowdy mobs of Hall & Oates fans sure to swarm the Rock and Roll Hall of Fame, but that wasn’t the main concern of Ed Yardeni’s clients in the Ohio city.
In meetings yesterday with his Cleveland accounts, the president of Yardeni Research Inc. said a common worry was that the drop in bond yields may be a harbinger of a U.S. economic slowdown. This year’s rally in Treasuries is signaling caution even as benchmark U.S. stock indexes repeatedly set records and the percentage of bulls in Investors Intelligence’s survey reaches the highest level since January 2005.
The conventional wisdom, at least among fixed-income traders, is that the bond market is always smarter than the stock market when it comes to reading the tea leaves that show where the economy is headed. The smartest of stock traders usually agree with this, and that’s why they always keep at least one eye, or at least a few lines of algo code, focused on the bond market.
But here’s the thing about conventional wisdom: you hear about it the most when it’s wrong. Now settle down bond traders. Before you fire off a nasty e-mail with an Ivy League-caliber CV attached to it, consider a few of the tea leaves the stock market is throwing off these days:
•Trucking, railroad and airline stocks are on fire. The Dow Jones Transportation Average of companies that ship all our stuff and people around is up 9.2 percent this year through yesterday, more than twice the S&P 500’s gain. Cowen & Co. raised its earnings estimates for railroads today, citing “robust” traffic growth of 7.5 percent in the first two months of the quarter.
•Check your trash. A growing economy creates more garbage. Wunderlich Securities’ “Dumpster Dive” report today includes a chart showing how solid-waste volume and gross domestic product are usually in such sweet harmony it rivals Hall & Oates’ “She’s Gone.” Per-week hours among trash haulers are near records and well above historical averages even as the number of collection employees is up 1.7 percent, Wunderlich said. It’s hard to imagine when the 10-year Treasury yield is below 3 percent, the report says, “but persistent 2 percent plus wage inflation, rising fuel and food prices have to work its way into rising inflation eventually, no?”
•Maybe it’s not the economy, stupid. The same economic concerns that drive investors to the safety of U.S. Treasuries have driven them out of European nations with shaky finances in recent years. Yet, Spanish and Italian 10-year yields reached record lows in anticipation of today’s rate cuts by the European Central Bank. Money has flowed into Treasuries because of those low European yields as well as unusual declines in China’s currency, according to LPL Financial strategist Jeff Kleintop, who rejects that bond and stock markets are in disagreement.
Anyway, some people have trouble remembering which one is Hall and which one is Oates. Daryl Hall is the tall, handsome, blond dude who does most of the singing. Oates is the shorter, swarthier guy with the mustache. Conventional wisdom is that the tall blonde is the mastermind, so bond traders probably think of themselves as the Daryl Hall of the markets. But the little guy sure can sing too.