Winning The Beauty Contest

One of the hardest things to understand as an investor is that markets sometimes – often – don’t line up with economic reality. Markets rarely reflect current economic conditions and at times they seem to discount a future that seems highly unlikely at best, and delusional at worst. That seems to be the case today, as stocks sit near all-time highs and the economic recovery falters in the face of the renewed virus outbreak (or whatever cause you want to assign). But it isn’t just stocks that seem to be discounting a better economic future.

We spend a lot of time watching the bond market as it often seems the wisest of the market crowds. The outlook from bonds has improved recently, although most of the rise in nominal rates is just a reflection of higher inflation expectations. Since November 6th, the 10-year breakeven inflation rate has risen from 1.64% to 1.89%. The change was driven by a rise in nominal rates (15 basis points) and a fall in real yields (10 basis points). The drop in TIPs yields can be read as a drop in real growth expectations, which certainly doesn’t sound like good news, although the market certainly seemed to interpret it that way. The S&P 500 rose 5.4% over the same time frame. Read more…..


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Icarus TV

Yahoo Finance’s Myles Udland, Jen Rogers, Brian Cheung, and Rick Newman break down “recessionomics” and the disconnect between the stock market and the economy.

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