The bull market was born nearly two years ago and has been sustained ever since by a sole premise: Inflation is falling faster than the U.S. economy is slowing.
The downslope of price pressures was set to meet the steady advance of GDP at a crossroads called Soft Landing, at which the Federal Reserve could undo, in triumphant but deliberate fashion, the policy tightening that began two-and-a-half years ago.
While these broad forces remain in place – both consumer inflation and real GDP running in the comfortable corridor between 2% and 3% – stocks are wobbling and bond yields swooning as investors worry the economy has gone from slowing to stalling.
That’s the pretty clear message of Wall Street relapsing into growth-scare mode as conviction in a soft landing leaks from asset prices, with the S&P 500 sliding 4.2% last week and returning to levels first reached in June. Utilities are now trouncing semiconductors this year, while the 10-year Treasury yield slumps to a 14-month low near 3.7%.
In a broader frame, the market at the July 16 all-time peak had fully capitalized on a fleeting embrace of perceived certainty: that a soft landing was in the bag, the Fed would ease at the right time for the right reasons and market breadth could improve while the crowded and expensive Magnificent 7 stocks held their premium.
We’re now a couple of months into questioning each of those beliefs. The imminence of a Fed rate cut and suspense over the macro data flow is draining the conviction of the bulls, but that’s not the same as saying their case is yet lost.
