Let’s start with interest rates. Both the equity and bond markets are currently priced for imminent interest rate cuts by the US Federal Reserve, fanned by remarks from the Fed chair Jerome Powell himself, though their expectations might differ in terms of quantum. The equity market has generally been more optimistic on rate cuts than bond investors, which explains in part the strong rally in high-growth tech stocks since the start of this year. Expectations have gyrated widely from as much as 1.5% in total reduction (by end-2024) at the beginning of the year to just 0.25%-0.5% and now, back to around 1%. These shifting expectations are reflected in the benchmark 10-year bond yield, which rose from 3.9% in January to above 4.7% in late-April, and has fallen back to near what it was at the start of the year, around 3.8% currently. The decline in yields from the April peak has underpinned both the recoveries in bonds (bond yields and prices are inversely correlated) as well as the equity market.
The global equity markets, led by US stocks, recovered quickly and strongly after the sudden steep sell-off in early August. Indeed, the S&P 500 Index is now just a hair’s breadth away from its July all-time record high. (At least it was at the point of writing. It may well be at fresh highs by the time this article is published.) Returns on US bonds, on the other hand, while positive year to date, are lagging far behind that of equities — and the Bloomberg US Treasury Total Returns Index remains some distance away from its pre-Covid-19 pandemic high (see Chart 1). So, what are the two markets telling us and how should we position our investments going forward?
