A Tale of Two Tapes

Equity Performance and Bond Yields

Source: FactSet Research Systems Inc., Standard & Poor’s, and Heartland Advisors, Inc., 12/31/1999 to 7/12/2019
All indices are unmanaged. It is not possible to invest directly in an index.
Past performance does not guarantee future results.

There’s nothing quite like the promise of a rate cut to get the animal spirits of Wall Street stirring.
Since early June, the market has been marching higher thanks to growing conviction that the Federal Reserve will lower rates to keep the economy expanding. In fact, the only sustained pause for equities came after an unexpectedly strong jobs report cast doubt on timing of the first cut.
The thinking goes that since cheap money has fueled growth and a rise in equities for years, why shouldn’t it work going forward? While this view has become conventional wisdom, at least one asset class in the market doesn’t seem to be on board.
A look at the gap between yield changes on the 10-year Treasury and performance of the S&P 500 points to two very different views on what’s next for the economy—with lower yield generally forecasting a slower economy. The discrepancy has reached levels not seen since pre-financial crisis in early 2007.
While we don’t foresee a repeat of those days, the disconnect should serve as a reminder how quickly today’s momentum can turn and why fundamental analysis could take on greater importance going forward.
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Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 18 years of industry experience, 11 at Heartland.

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