One crossed-out word was all it took to send financial markets into a unified celebration that has few precedents in the past decade.
Stocks rose to records, bonds surged, oil jumped almost 10% and even gold got into the act, as traders celebrated a dovish conversion at the Federal Reserve. One back-of-the-envelope measure shows the rally in everything was the strongest since 2011.
Banished of late has been the soul searching that had afflicted investors for more than a year. Instead, investors closed their eyes and bought, fortified by the willingness of Jerome Powell’s central bank to forego its pledge to be “patient” in formulating interest-rate policy.
“Bonds are running because of what the Fed is doing directly, and then everything else is running because the Fed’s actions have decreased the chance of a recession,” said Steve Chiavarone, a portfolio manager with Federated Investors. “That’s exactly what the Fed said they wanted to do. They want to extend the expansion.”
They’re also extending the rally. The average wire-to-wire return in stocks, bonds, oil and gold was somewhere around 4% in the week, the most since 2011. Proxies less hostage to high-volatility assets — AQR Capital Management’s risk-parity portfolios, for instance — posted more muted gains that were still among the biggest in years.
Worryingly to many, the rally continued to lift both risk-on and risk-off assets. While equity and oil surged, so too did government bonds, pushing the 10-year Treasury yield below 2% for the first time since 2016. The moves extended the “dueling bull market” theme in which Treasury traders fret about dimming growth while everyone else celebrates an accommodative Fed. Each camp expects it to end badly for the other.
“A race of this pace in both stocks and fixed income is unsustainable,” said Marshall Front, the chief investment officer at Front Barnett Associates. “People who were long bonds are going to have a problem. We’re not going to have a recession or a dip in economic activity that’s going to take us off course, and rates are going to go back up.”
Others are less squeamish.
“There’s been a lot of press suggesting that the bond and stock markets are conveying different messages to investors,” said Mark Heppenstall, chief investment officer of Penn Mutual Asset Management. “But to me where we stand in interest rates today, where we stand in persistent low inflation today means that whatever investors are willing to pay for earnings should be higher based on the fact that interest rates are lower.”
For now, it’s a boon to portfolios modeled on the classic 60/40 stock-bond allocation. The first quarter marked the best period for the strategy in nearly a decade, and now it looks as though those gains are set to grow come the end of the second.
For the naturally skeptical, it’s hard to watch everything go up at once without conjuring visions of bubbles doomed to pop. Getting the timing right on those calls is harder than it might seem.
In the 12 months following days when pretty much every asset class rose in unison, the S&P 500 has been higher nearly 70% of the time, with a median gain of roughly 8%, according to data from Sundial Capital Research Inc. When compared to the returns of fixed income, currencies and commodities, stocks almost always outperformed over the same period.
“There is some risk that activity like this is bubblicious,” Jason Goepfert, president of Sundial, wrote to clients Wednesday. “But it hasn’t been that much of a worry. It triggered before the ’87 crash and again at the top of the 2000 bubble, but otherwise it was mostly fake news.”
Conversely, the dollar lost momentum this week in the wake of a dovish Fed and lower inflation expectations, which tends to strengthen the case for other assets. A weaker greenback could help sales for large companies that do business overseas as prices turn incrementally cheaper in other countries. It also helps commodities that are priced in dollars like gold.
Lindsey Bell, an investment strategist at CFRA, is recommending that her clients increase exposure to the metal through exchange-traded funds, like the $33 billion SPDR Gold Shares fund or the $12.5 billion iShares Gold Trust. TD Securities also raised its price target for a long gold trade.
Don’t fight the Fed, reasons Chiavarone.
“Everyone, whether they admit it or not, believes that there needs to be some major comeuppance, some cleansing moment, because for whatever reason the good puritan instinct that lies in America feels as though you can only cleanse through some level of pain,” he said. “There’s an obsession of when the next recession is going to come. What I think has been forgotten is that if you want lower for longer, you also have to accept the longer part of it. And that’s what we’re getting.”