Most psychologists will tell you that people who tell lies generally leave out details, admit to faulty memory, make quick corrections, and keep things short and vague. When markets are trying to tell a fib, often asset class movements don’t work to corroborate the same story. Since the December lows, this seems to be what has been happening for both risk-on assets like stocks and risk-off assets such as bonds and gold.
Typically, stocks will rise along with economic optimism, which accompanies rising interest rates and falling prices for assets like gold and bonds. Since the December lows for equities, the opposite has been the case.
Stocks have been rising (the black line in the chart above) while bonds (blue line) and gold (red line) have seen a continuation of their fourth-quarter rally. Our best guess is that the lack of confirmation from low-risk asset classes like bonds and gold means that the current rally in stocks may be due for a pullback in the not too distant future. Stocks have risen as December’s pessimism turned to optimism fueled in large part by global central banks promising to stop their rate-rising ways. Yet earnings estimates and economic growth indications have been falling, helping the continuation of the bond and gold rally.
With stocks, bonds, and gold all moving in the same direction, one or more of these asset classes appears to be untruthful. Given the global bond market is the largest and often tends to be the most honest, we’d look for a pause in the current equity market rally before too long.
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