The US stocks were able to erase their Brexit trauma and pull within inches of a record on Friday was impressive enough. That they did it on a day bond yields were flirting with all-time lows is unprecedented.
Shares tracked by the S&P 500 Index briefly rose above a closing high that has stood for 13 months, helped along by the strongest employment report since October. At the same time, yields on 10-year Treasuries slid within mere basis points of their all-time intraday low set this week.
It isn’t supposed to happen that way - in fact, it never has. At no time in history have government bonds and US equities, generally viewed as risk-on/risk-off complements, ended the same trading session this close to their respective records, according to data compiled by Bloomberg.
That it’s happening now is testament to the forces splintering sentiment in markets fixated on the pace of global growth and Federal Reserve policy. Stocks have been on a particularly violent roller coaster, erasing two 10% corrections in 10 months and restoring $1.4tn lost in the Brexit aftermath in just eight sessions.
“The stock market and bond market are expressing very different opinions,” said Jack Ablin, the Chicago-based chief investment officer of BMO Private Bank, which oversees about $66bn. “It seems, at least on the surface, to be incongruous. Obviously I’m happy for the bulls, but I get the sense that there’s something dysfunctional going on.”
To be sure, bulls weren’t in complete control of Treasuries on Friday. Two-year notes fell following the jobs data, and longer-dated debt was boosted by buyers that emerged on the initial selloff. As a result, the gap between yields on five- and 30-year debt, a measure of the yield curve, touched the narrowest since March 2015.
One fact that helps explain the concerted moves in bonds and equities is the defensive contour of the rally in stocks. With the exception of energy producers, industries leading the S&P 500 have been ones whose fortunes are tied least to the economic cycle.
Utilities, phone companies, makers of consumer staples are all up more than 10% in 2016 and are three of the four best performing groups.
“The stock market is reacting to better-than-expected economic data here in the US, while bond yields are more at the mercy of what’s happening internationally,” said Walter Todd, who oversees about $1.1bn as chief investment officer for Greenwood Capital Associates in South Carolina. “That’s created a disconnect. There’s demand for US dollar assets, and whether it’s stocks or bonds, there’s a ton of money flowing into the US”.
Buoyed by the payrolls data, the benchmark gauge for American equity jumped above 2,130.82, a high water mark that has stood since May 21, 2015, before sliding back below at the close. The brief trip past the record came about four hours after the S&P 500 completed the process of erasing all the value lost in the two days after UK secession.
Capping two straight weeks of gains, the S&P 500 closed on Friday at 2,129.90 points, up 1.3% for the holiday-shortened stretch. The Dow Jones Industrial Average climbed 1.1% over the four sessions to 18,146.74, while the Nasdaq Composite Index surged 1.9%.
“What stands out is the resilience,” said Joe “JJ” Kinahan, chief strategist at TD Ameritrade Holding Corp. “The fact that the market’s been able to hang in there with bond prices continuing to go higher and with crude continuing to go lower is actually pretty amazing.”
Ten-year Treasuries rallied a sixth straight week, buoyed as global economic stagnation has pushed yields on almost $10tn of government debt worldwide below zero, according to Bloomberg World Sovereign Bond Indexes.
Oil tumbled 7.3%, the biggest weekly decline in five months. For now, neither that nor the pessimism emanating from fixed-income markets seems to be an issue for equity investors, who took their cue from economic reports that showed the US economy’s ill health may have been overstated.
It’s a far cry from the carnage of June 24 and 27, when stocks tumbled 5.3%, led by the worst selloff for financial companies since 2011. Just two weeks ago investors were living through the biggest one-day spike in the CBOE Volatility Index in almost five years, lifting it to levels last seen in February.
Fast-forward to last week when, in addition to the jump in hiring, a report on Wednesday showed service providers expanded in June at the fastest pace in seven months, while minutes of the Fed’s June meeting indicated policy makers saw less urgency to raise interest rates.
The market set its third year-to-date high even as second-quarter earnings season is about to start, with analysts forecast a fifth straight contraction in profits.
“The jobs report is the start of a catalyst, but it needs a follow-through with earnings,” said Bill Schultz, who oversees $1.2bn as chief investment officer at McQueen, Ball & Associates in Bethlehem, Pennsylvania. “That will dictate how much higher we can get in the stock market.”