The Bond Market is Back. So is COVID. Do Stock Markets Care?

Yesterday I noted that stocks were enjoying a respite from higher bond yields, even though those higher yields portended stronger economic growth. Today we see bond yields decline, signaling economic worries, but stocks seem to care little. Does anything really matter to the stock markets these days?

I summed up my current read on the markets in this morning’s New York Times: Right now, the market can put a bullish interpretation on any piece of news. We dreaded an unsettled, contested election – that’s what we got, but hey, we got a divided government so let’s rally. Covid is raging throughout the world – but hey, we don’t really have the political will to roll back the economy too far, so that’s no big deal. And besides, we can always buy more “stay at home” stocks. Of course, when unequivocally good news arose on the vaccine front, it became a signal to race into economically sensitive stocks even though it will take some time for the vaccine to be formally approved and distributed. 

Markets are said to climb a wall of worry. If so, there is plenty to worry about. Rather than fretting about externalities that could upset a bullish narrative, markets have decided that the combination of momentum and easy money are sufficient reasons to continue an upward move. If one set of stocks isn’t to the market’s narrative on any given day, then if will find either another set or another narrative to suit its needs.

One begins to question what might change this sentiment. Unfortunately, that is an incredibly difficult question to answer. Although we can point to technical indicators that show cracks in the market façade, such as an RSI indicator that fails to confirm the new highs that we have approached, a narrative change requires something more concrete. Until or unless we see that broad change in sentiment precipitated by political worries or some diminution of the Federal Reserve’s balance sheet or monetary support, the trends remain difficult to ignore and certainly to fight.