Stocks Are Celebrating-But Bonds Are Screaming

<p>Stocks are celebrating.</p><p>Bonds are screaming.</p><p>Oil is boiling.</p><p>And the American labor market may be running out of gas.</p><p>Welcome to one of the strangest economic environments we have experienced in decades.</p><p>This week, the stock market once again approached record highs. Investors appear optimistic. Technology companies are rising. Artificial intelligence continues attracting enormous amounts of capital. Corporate earnings expectations remain strong.</p><p>If you looked only at the stock market, you might conclude that the American economy is doing beautifully.</p><p>But then you look across the street at the bond market.</p><p>The yield on the 10-year United States Treasury is approximately 5.25%—near its highest level since 2002.</p><p>That yield influences mortgage rates, business loans, government borrowing costs and the value investors place on practically every financial asset in America.</p><p>Then we have oil.</p><p>Brent crude is above $100 per barrel, threatening to push gasoline, transportation and production costs higher.</p><p>Then we have the labor market.</p><p>Last Friday, the government reported that America created only 29,000 jobs in September. That was not simply a disappointing number. Over the previous 12 months, monthly job growth averaged only 45,000.</p><p>And yet the stock market rallied.</p><p>How can all of these things be happening at the same time?</p><p>The answer begins with understanding that the stock market is not the economy.</p><p>Stocks primarily measure what investors believe publicly traded companies will earn in the future.</p><p>The bond market measures something different. It reflects expectations for inflation, interest rates, government borrowing and the value of money over time.</p><p>Stocks are voting on profits.</p><p>Bonds are voting on the cost of money.</p><p>And right now, they are delivering very different messages.</p><p>The stock market believes that large American companies—particularly technology and artificial-intelligence companies—can continue growing their profits.</p><p>The bond market is warning that inflation may remain stubborn, the government must borrow enormous amounts of money, and investors are demanding substantially more compensation to lend that money for ten or thirty years.</p><p>Both markets could be correct—at least temporarily.</p>