Falling Yields Aren't A Harbinger Of Doom

To many observers the 28 percent decline in the U.S. 10-year Treasury yield this year is a clear warning of trouble ahead. A common theme in financial commentaries is that falling bond rates reflects the widespread fear of a coming recession. Yet this conclusion obscures the fact that falling bond rates typically precede a period of outperformance for equities. In today's report we'll examine the variables which collectively point to higher stock prices ahead and a positive flight path for the economy, thanks in part to lower yields.
You wouldn't know it from looking at the stock market's performance this year, but 2019 has so far been the year of the fear trade. Instead of taking advantage of the many bargains for sale in the equity market in January after last year's 20% decline, investors instead flocked to the safety of Treasury bonds. This move toward capital preservation at the expense of capital gains has been a steady theme this year, with other safe havens including gold gaining in popularity while risk assets are largely ignored.
The S&P 500 Index (SPX) has posted a respectable performance in the first six months of this year, reaching an all-time high at the end of June and climbing 21% since the December 2018 low. Yet despite the profitable ride for those brave enough to buy equities, the U.S. 10-year Treasury bond has been the preferred investment for all too many investors. This can be seen in the following graph, which compares the iShares 10-20 Year... Read more