Since the early March lows, Global stock markets are up over 25%, global central bank sponsored liquidity is up over $3 trillion, and global sovereign bond prices are also up around 3%. As the chart below shows, bonds and stocks are sending drastically different signals in this most recent melt-up...
The sharp stock market rebound has been fueled in a large part by massive policy support from central banks and governments, as well as by recent improvements in countries such as Italy and France.
“I would say it’s the biggest disconnect I’ve seen between bonds and stocks in a long time,” Invesco’s global market strategist Brian Levitt told Bloomberg by phone.
“I think we need to be very mindful about what the bond market is telling us.”
But for the strategist of the Atlanta-based firm which oversees about $1.2 trillion in assets, the economic recovery will likely be gradual, rather than a quick, V-shaped bounce.
“The bond market is still pricing in very, very weak growth and little by way of inflation,” Levitt said, adding that the fixed income market usually gets it right more than stocks, at least in the near term.
“Look, this is a process, bottoming is a process, reopening the economy is a process, it’ll take time. The equity market appears a little bit short-term overbought. Is there a catalyst to take us meaningfully higher from here? I suspect no.”
And in fact, this decoupling between bonds and stocks has been going on for years as financial assets rise on a bed of central bank liquidity...
Economic and Earnings collapses are not due to bounce back anytime soon:
“I think at some point equity investors in the near term are getting a little bit too optimistic about the ability to reopen the economy,” Levitt warned.
“And I suspect that in the near term, some volatility and drawdowns could be in the offing.”
Levitt ends on a rather dour note, while suggesting investors focus their purchasing power on small caps and value stocks, he warns:
“What we need to largely be prepared for is: the world growing at a slow rate for a lot of the rest of our lives,”
Which prompts the question - just how 'angry' will the average joe world citizen be when faced with record high stocks and a record plunge in living standards?