Stock Market: Euphoria or on the Cusp of Doom?
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Here's your Money Briefing. I'm J.R. Whalen at The Wall Street Journal in New York. The bond market's message is things economically are close to dire. The stock market, still near record highs, indicates everything is fine. Can both be true? We'll bring in a Journal of Markets columnist in a moment to decode Wall Street's mixed messages. First, some money and market news you should know. Well, you don't need us to tell you that the nation's biggest metropolitan areas are also the most expensive places to retire.
Why are bond yields signalling economic trouble while stocks stay near records?
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It was the best of times. It was the worst of times. Charles Dickens may as well have been writing about the tale of two markets. But how do we make sense of a bond market telegraphing fear coupled with a stock market that still remains near record high levels? Let's bring in Wall Street Journal Markets columnist James McIntosh to help us clear things up. So, James, oftentimes we see relationships and movement between the bond market and stock market. But as you point out in your column, those ties were severed almost entirely.
What quick market headlines and retirement-cost data should investors know?
August.
Yeah, August was really quite dramatic. You had some of the best performances from treasuries in, well, the third best month ever for the longest treasury bond. And certainly among the best performances from other durations of bonds. So, you know, really quite extraordinary. Stocks, though, down a little bit, but really not the sort of thing that shows any particular signs of worry. And this disconnect, frankly, has had me scratching my head for quite a while because whilst August was especially extreme, it's been going on for quite a while before that as well.
You know, but stock market investors moving from riskier to safer stocks, which they did, usually doesn't translate to the market staying at such a high level.
Well, exactly. So the interesting thing is you can say, look, there has been this rotation within the market. So people have bought things that look like bonds, and that's helped to hold the market up a bit. They're searching for safety. They're not ready to panic. And of course, even stocks that don't look like bonds benefit from lower bond yields. Companies can borrow more cheaply. The future expectations of interest rates are lower, so they expect to be able to borrow more cheaply in future too. And of course, people expect less inflation in the future, so future profits are worth more in today's money because they won't be eroded by inflation. So all of those things help to hold up stocks. But still, the sense of just total exceptionality that's going on in the bond market hasn't carried over into stocks.
And that's what's sort of forming this puzzle.
Another mystery is how the stock market can stay so high. When investors ran to gold to take cover amid fears of a weakening economy, usually money used to buy gold a lot of times comes from money investors are holding in stocks.
Well, this is one of the questions. So have people panicked and bought gold and bonds, or have they just quite rationally said, look, we're expecting a slower economy, lower inflation? lower interest rates. All of that will be good for corporate profits. The lower interest rates will help to offset the impact on the lower profits. We don't really expect a profit collapse. Gold does well because we expect lower interest rates, and that means that the zero yield on gold is less bad than it usually is.
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