Though the stock market is now 7 months away from the bear market lows from last October, investor sentiment remains stubbornly negative. In fact, using the AAII Sentiment Survey weekly data, there have only been 2 weeks over the last year and only 3 weeks since the beginning of 2022 (71 weeks of data) that there were more bulls than bears. Extraordinary. This data series goes back to 1987 and there has never been a stretch like this. Granted, there are plenty of things to worry about (as there always are), including the current fears of economic weakness and high inflation. Is the excessive negative sentiment warranted though? Let’s consider the view of what many consider the best economist around — the bond market. Not only do bonds take a larger share of the global markets, the bond market’s various interest rates reflect and influence economic fundamentals. So, what is the bond market saying now about U.S. economic conditions?
Let’s consider 5-year Treasury bonds. The current yield is about 3.5% (yields have been falling for 7 months now), which compares to the long term average of 3.75% since 1990. There are two primary factors that compose Treasury yields. The first is inflation expectations. The second is the “real” interest rate (the nominal rate minus inflation), which reflects uncertainty about the future path of interest rates and economic outlook. The current 5-year inflation expectation is 2.2%. This compares to last week’s CPI of 4.9% and the long-term average back to 1990 of 2.7%. In short, the bond market doesn’t think inflation is a problem. How about economic growth concerns? Now let’s look at credit spreads, or the difference between corporate bond yields and Treasury bonds. If that spread is wide by historical standards, or getting wider, or both, then the bond market is concerned about economic growth. Currently, that is not happening either, especially when you look at the long-term history of credit spreads. Bottom line, the bond market does not appear to be as concerned as stock market investors are.
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