As the new year kicks off, the bond and stock markets seem to be expecting different outcomes this year. The bond market closed 2023 with a torrid rally that took the yield on the five-year note to 3.8%, down significantly from the mid-October high of nearly 5%. Similarly, stocks, as measured by the S&P 500 closed the year less than 1% away from an all-time high. Seemingly, bond investors view the economy as being on the precipice of, if not already in, a recession; while equity investors seem to be anticipating that profitability is about to reaccelerate. The obvious culprit for the divergence in views is the Federal Reserve’s about-face on interest rates. Prior to the December FOMC meeting, the Fed’s monetary policy had been communicated as “higher for longer” indicating that they were in no hurry to cut interest rates as inflation drifted back to their stated target of 2%.
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