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30-year US Treasury bonds should outperform the stock market as the Fed tightening cycle nears its end.
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That’s according to top economist David Rosenberg, who called the 2008 housing crash.
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Rosenberg said the current stock market rally “has been rather junky.”
Bonds should outperform stocks as the Federal Reserve ends its cycle of hiking interest rates, according to renowned economist David Rosenberg.
The Fed hasn’t hiked interest rates since its July meeting, and the market isn’t expecting a rate hike at the Fed’s last FOMC meeting of the year next month. This signals the potential end of the Fed’s tightening cycle, making bonds a more attractive investment than stocks.
In a recent op-ed in the Financial Post, Rosenberg stated, “If the Fed does keep interest rates unchanged at its December FOMC meeting, the cycle is over. The next move would be a cut.”
Moreover, if the Fed does decide to maintain interest rates, “the cycle is over. The next move would be a cut,” Rosenberg said in a Financial Post op-ed on Tuesday.
This contrasts with the period of rising interest rates, during which risky assets like stocks tend to outperform bonds. However, during a pause in rate hikes, long-term bonds, such as the 30-year US Treasury, often deliver higher returns compared to stocks.
Rosenberg emphasized, “In that pause period, bonds and stocks tend to rally together. But nothing does as well as the 30-year Treasury, which traditionally delivers an average total return of 9% point to point.” This outperforms stock and corporate bonds’ average returns over the same time period.
The outperformance is significant not only because of the difference in returns but also because long-term bonds generally carry less risk than stocks.
Rosenberg also expressed skepticism about the sustainability of the recent stock market rally. He noted that the surge in stock prices has been “rather junky” and “lacks fundamentals.”
Rosenberg said the recent six percent rally in the S&P 500 has been led by stocks with weak balance sheets and no profitability, casting doubts on the sustainability of the rally.
“We have seen a rather sharp outperformance by stocks that were most shorted, have weak balance sheet, and non-profitable tech,” Rosenberg highlighted. “A polarized rally with no verve in small caps [indicates] concerns about economic momentum.”
Economic concerns for Rosenberg include a steady reduction in monthly jobs added to the economy, as well as an unemployment rate that has jumped 50 basis points from its cycle low, from 3.4% in April to 3.9% in October, which Rosenberg believes signals an impending recession.
Read the original article on Business Insider
