Bulls and Bears Are Both Winning as Markets Take Strange Turn

  • Gold, yen, bonds charge higher in tandem with global stocks
  • BofA Merrill Lynch among those saying something has to give

UBS's Emanuel Sees Disconnect in Markets and Data

Markets are handing rosy returns to optimists as well as pessimists. History tells us it ain’t going to last.

The march higher in global stocks this year is being tracked by rallies in gold, the yen and bonds -- traditional haven assets. There are plenty of reasons being cautious is paying off: politics in Washington is fractured, tension on the Korean peninsula is rising and worries have revived about low U.S. inflation. That’s not been in the way of equity bulls who have driven up the value of stocks worldwide by more than $10 trillion in the past year.

Here’s a look at how some favored trades are panning out, both for the bulls and the bears:

Investors are making money from an increase in bonds and stocks. Equity prices reflect the benefit of the doubt being given to a rosier global economic outlook. The S&P 500 has gained about 9 percent for the year through Friday, with strong corporate results giving support to a market that is, by at least one gauge, near the highest valuation since the dot-com era.

For pessimists, the lack of American price gains is one factor lifting fixed-income returns this year, as shown with the 4.7 percent advance for the Bloomberg Barclays Global-Aggregate Total Return Index. And with economists warning that the U.S. expansion is rather long in the tooth at this point, that trade may have further to run.

One popular trade for equity bulls has been to remain long on America’s technology giants. That remains a winner as their market capitalization swells.

And the decision by some to bet that the advance in emerging-market stocks will exceed gains in U.S. shares continues to bear fruit, with returns on developing-nation equities almost double this year. The biggest rewards from this trade may be behind us, Credit Suisse Group AG warns.

But then proponents of the short-dollar trade are enjoying the unwind of all the gains following Trump’s November victory. The Bloomberg Dollar Spot Index is down more than 5 percent this year as worries over the U.S. economy chime with a tougher outlook for the President’s reform policies. One Fed district-bank chief says he wishes inflation were running away, but, as he observes, it’s not.

At the end of the day, bonds and stocks can’t keep this up, says Shyam Rajan, Bank of America Merrill Lynch’s head of U.S. rates strategy in New York. Either stocks need to fall by a magnitude of some 30 percent, or else you’ll see a bond yields 50 percent higher as the imbalance between the two asset classes recedes. For now, as we approach the mid-point for the year, the bulls and the bears are still winning.

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