The bond market rally that started in October last year is no more. Yields across most of the curve are more than half a percent offside from whence they came. Commensurately, rate cut expectations for this year have gone from 7 to maybe no more than 3, and thus come in line with what the Fed has been telling us all along. Much ado about nothing, so why is the S&P500 still up more than 20%?
Clearly, it has a lot to do with Nvidia. Up a staggering 81% in a mere three months, it is now the fourth largest company on the planet by market capitalisation, and there seems little in the way of stopping the AI revolution. Apple and Microsoft also haven’t done too badly, lest we forget that when you are producing this much cash, higher interest rates are the least of your problems.
We are also in an election year. Say what you want about any political party vying for the top prize, but few get elected by giving people bad news. There is a reason stock markets tend to do well as politicians are trying to sway aspiring voters with promises of fiscal giveaways, and when was the last time tax cuts weren’t part of any election manifesto?
Ultimately, it comes down to this. When the bond markets were signalling recession, yet the stock markets were making new all-time highs, we knew both could not be right. It was an epic battle, fought between those that claim intellectual superiority because they can calculate a yield to maturity and those that can get confused when there are stock splits. Yet, here we are, and evidently, the fixed income guys got it wrong!