High-speed market changes are rooted in the economic boom thesis

(Bloomberg) — At times in recent weeks, trying to get a consistent message out of disparate swings across asset classes has been an exercise in futility.

Where once rising bond yields and commodity prices meant big trouble for stocks, now stocks are rising along with them. The tightening of the hawkish line at the Federal Reserve began as a reason for panic in risk markets. Now, even the threat of gigantic interest rate hikes isn’t enough to bother Wall Street bulls.

The pivots have been quick and probably not done. Still, something approaching a unified theme seems to have coalesced in the latest vintage: resurgent faith in the growth trajectory. Armed with bullish readings on manufacturing and hiring, markets have begun to behave as if they expect the economy to avoid a contraction and expand.

“The Fed is and has been walking into a boom,” said Neil Dutta, head of economics at Renaissance Macro Research. “Signs of recession in US economic data are a lot like looking for intelligent life on other planets: possible sightings, none confirmed.”

The solid backdrop is hard to dismiss, at least for now. Growth in the US economy accelerated last quarter, while earnings at S&P 500 companies posted double-digit expansion for the fourth consecutive time. According to analyst forecasts, corporate profits will grow about 10% annually through at least 2024. Meanwhile, gross domestic product is expected to rise more than 2% in each of the next six quarters.

In most cases, a pattern has emerged in the markets after the Fed’s March 16 rate hike, one of gains in risky assets. Oil is up 17%, the S&P 500 is up 6.6%, and 10-year Treasury yields are approaching 2.5%, the highest level in nearly three years.

A basket of unprofitable tech firms, battered during the first two months of 2022 as the specter of higher rates weighed on their valuation, hit a low just before the Fed rate decision and have since risen nearly 30% . Newly minted stocks, many of which have yet to make any money, show the same trajectory. An exchange-traded fund that tracks recent IPOs is up about 20% in the tranche.

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To be sure, there are different explanations for each individual move. Oil obviously got a big boost after Russia’s invasion of Ukraine. But the rally in commodities began months ago as demand boomed.

For Peter Tchir, head of macro strategist at Academy Securities Inc., inconsistent asset correlations are the story of the markets right now.

“I’m struggling to figure out the ‘tell’ in what seems like a very confusing, messy and even unusual market,” Tchir said. “I’m old enough to remember when higher yields used to scare big tech stocks (maybe because that was only a couple of weeks ago). Now it seems like we’re more in a ‘risk’ or ‘risk off’ mode.”

There are signs around the burgeoning economic optimism, investors themselves are not very convinced. Stock trading volume, for example, on Thursday fell to a five-week low. Meanwhile, US stock funds suffered their biggest weekly outflows in two months, EPFR Global data compiled by Bank of America Corp shows.

Adding to the confusion are conflicting messages from the bond market. A growing list of curve inversions in Treasury yields has caused investor distress, with some pointing to a rapid narrowing of the spread between two-year and 10-year Treasury rates as a warning sign of a recession.

Fed Chairman Jerome Powell weighed in on the issue earlier this week, suggesting that the central bank prefers a different yield curve measure, one that focuses on short-dated Treasuries: three-month instead of 18 months. And that part of the curve has steepened to the maximum on record.

“The economy has room to function. I think it’s going to be slower than last year for sure,” Megan Horneman, chief investment officer at Verdence Capital Advisors, said by phone. “But I don’t think I’m ready to say that this expansion is over or that we’re headed for an imminent recession.”

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