"When asset classes diverge, investors should take note," says The Economist's Buttonwood column. While the Dow Jones Industrial Average has risen steadily since July and is now back at its all-time high, over the same period the yield on the ten-year Treasury bond has slumped from 5.25% to 4.65%. In other words, they are taking different views on the economic outlook: bonds are already pricing in a slowdown followed by rate cuts, while equities are betting that the economy will remain strong (although not so strong that the Fed will hike rates).
With the markets apparently sitting in opposite corners, it's easy to suppose that "one will emerge with a bloody nose", says Thorold Barker in the FT. But it can be credibly argued that both stocks and bonds are factoring in a type of "soft landing" for the economy. If US growth slows, rates will be cut. The result of this will be lower bond yields, which will make stocks look more attractive in comparison. So perhaps both equities and bonds are pricing in this scenario already.
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