Bloomberg News reports that the increasing gap between bonds and stocks signals a 20% downside risk for equities. This will happen if the bonds are correct in the pricing of volatility in inflation. It is as per the model worked out by the JPMorgan Chase & Co strategists.
This indicates how several investors hold different asset classes. They are battling to make sense of the market scenario since the Covid-19 pandemic. The divergence was evident in the current week when the S&P 500 index entered a bull market. It was like an another hike in the Federal Reserve rate in July is anticipated. This occurred after the central banks were found wrong-footing traders in Canada and Australia.
Volatility ruling markets
Strategists Mika Inkinen and Nikolaos Panigirtzoglou has said that the bonds markets are to price in still in a period that is being ruled by macroeconomic uncertainty. There has been a small decline in the last three months. Moreover, by contrast, the equity markets appear priced for perfection. With the S&P 500 index now well above a fair value estimate gazing through the escalation in the macroeconomic volatility since Covid-19 pandemic.
Bloomberg News reports that inflation volatility is a risk to the bonds too. The strategists have also mentioned that the bond markets are to look through a rise in inflation volume right from early 2021. There could be a drop in the real US Treasury by approximately 70 basis points.
According to the JP Morgan model, there is a significant correlation between bond market inflation and a 20% decline in stocks. This finding suggests that investors should closely monitor the bond market and inflationary trends as they can profoundly impact stock market performance. While this model provides valuable insights, it’s important to note that market dynamics are complex and influenced by numerous factors. Therefore, investors should exercise caution and consider a holistic approach when making investment decisions, taking into account various economic indicators and market conditions.
