Stocks are driven by stories. Stories such as AI, weight-loss medication, or CRE being a headwind for regional banks.
The bond market, on the other hand, is different. Bonds and credit are contracts. Contracts are formal and legally binding agreements about delivering future cash flows to investors.
The most remarkable difference between stocks and bonds is how unquantifiable stories are, how stories come and go, and how stories involve selecting certain facts and ignoring other facts.
At the moment, stocks are focusing on the rapid decline in inflation. But stocks could also have chosen to focus on rising delinquency rates on credit cards and auto loans, the rise in HY default rates, or the rapid decline in bank lending, see charts below. But these facts are complicated. So, for now, the stock market is holding on to the simple story that inflation is falling. Without the nuance that a rapid decline in inflation would often be driven by a rapid decline in the economy.
With Fed hikes every day biting harder and harder on consumers, firms, and banks, and rates staying high at least until the middle of 2024, the risks are rising that we over the next six months will get a soft landing in inflation and a hard landing in the labor market.
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