Stock prices have been rising, which usually predicts a rising economy. At the same time, bond yields have been falling, which usually goes means trouble ahead. Which is it?
Maybe it’s neither. Prior to the European Central Bank announcing last spring that they would do “whatever it takes” to defend the Euro, the global economy was characterized by slow growth and high instability. Investors were preoccupied with a potential repeat of 2008, of the “Lehman moment” that almost precipitated Depression 2.0. Fears of a “double dip” were rampant.
But the ECB’s policies have reduced the risk of catastrophic failure from the European banking system for now, with its attendant threat of financial contagion. The equity risk premium has fallen globally, so equities have risen.
But the underlying growth in the world’s economy remains low and slow. Stock prices have gone up on a lack of fear; bond yields have fallen with the global savings glut. There is no inconsistency. Markets alternate between fear and greed. We’ve been leaving the fear behind. Are we greedy yet? Time will tell.
Douglas R. Tengdin, CFA
Chief Investment Officer
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