Stocks and Bonds Are Talking Past Each Other

Global stocks are holding fast to robust 2019 gains, even as trade turbulence has sent bond yields to multiyear lows and pushed oil into a bear market.

The yawning gap between markets is perplexing some investors, who say they struggle to discern how stocks can churn higher when bond yields are signaling a downturn may not be far off.

The S&P 500 and Dow Jones Industrial Average are both less than 5% away from their all-time highs, despite suffering their biggest one-day drop since December last week. And benchmark indexes from Europe to Brazil to Shanghai are all up at least 10% for the year.

“We are still fully invested,” said Rick Anderson, chief investment officer at Hull Investments. Mr. Anderson added that, although he expects more volatility as the 2020 elections approach, he is holding out hope that the U.S.-China trade conflict will “be resolved constructively.”

But signs of unease in other markets have intensified in the past few weeks.

The yield on the benchmark 10-year U.S. Treasury note fell to 1.675% Wednesday—a level it hadn’t hit since the month before the 2016 elections. That followed a trio of surprisingly aggressive interest-rate cuts by central banks in the Asia-Pacific region earlier this month. Brent crude has fallen more than 20% from its April peak. Gold prices, which typically rise when investors are seeking havens, are up nearly 20% for the year.

“It feels like there’s a lot of complacency in stocks,” said Michael Farr, president of investment firm Farr, Miller & Washington. “I don’t think we see a recession on the horizon, but certainly we’re closer to it and the odds of one have gone up a lot.”

Among the biggest worries for money managers are the latest escalations in tensions between the U.S. and China.

At the start of the year, many investors had been expecting the two countries to reach a tentative truce by the summer. That assumption—along with bets that the Federal Reserve would lower interest rates—had helped send stocks racing to records in the first half of 2019.

But the events of the past few weeks have dashed many investors’ hopes, forcing them to reassess their expectations for the markets for the rest of the year.

President Trump said Friday that he was prepared for China to pull out of trade talks that were tentatively set to resume again in Washington in September. That followed China allowing the yuan to decline in offshore trading to a record low last Monday, a move Mr. Trump described as currency manipulation.

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“The politics of the situation are so fluid,” said Steven Violin, senior vice president and portfolio manager at F.L. Putnam Investment Management Co. “We went from seeing in the spring [U.S. officials] saying 90% of the deal was done to seeing the whole thing fall apart.”

Now, Mr. Violin said, it seems the risk of recession has materially risen—though he is in the camp of investors who believe the U.S. expansion still has room to run for now. He added that his firm had adjusted its portfolios to account for the likelihood that the U.S.-China trade fight lasts even longer. The firm has generally dialed back on its holdings of shares that are particularly sensitive to the two countries’ trade relations, like the industrial sector.

Shares of industrial companies have tumbled in August as the trade conflict has heated up. Equipment maker


for instance, has fallen 9.3% since the turn of the month, while miner Freeport-McMoRan Inc. has shed 12% and farm-machinery maker


& Co. has fallen 6.5%.

So far, the malaise hitting industrial and agricultural stocks hasn’t rippled across the broader market in the same way: The S&P 500 is down 2.1% in August, but not far from its July record.

Analysts say the overall stock market has been resilient because economic data in the U.S. have for the most part behaved in a similar way, pointing to a weakening manufacturing sector but still solid gains across areas like the labor market and consumer spending.

The U.S. added 164,000 jobs in July, Labor Department data showed, extending a record 106-month-long streak of job creation. Household spending ticked up 0.3% in June, moderating slightly from previous months but pointing to a still-resilient consumer. The latter point has been particularly reassuring for investors, since consumer spending accounts for more than half of U.S. economic activity.

Investors will get a fresh look at spending on Thursday, when the Commerce Department releases data on retail sales for July.

Even those who believe stocks can carve out further gains warn there could be further volatility ahead. “Events like this don’t usually end right away,” said Quincy Krosby, chief market strategist at Prudential Financial.

Investors will get a fresh look at spending on Thursday, when the Commerce Department releases data on retail sales for July.


Eduardo Munoz Alvarez/VIEWpress/Corbis/Getty Images

Write to Akane Otani at

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