The stock and bond markets are telling two different stories. The S & P 500 and Dow Jones Industrial Average posted record closing highs on Monday, adding to the momentum seen since the Federal Reserve cut interest rates last week. For the third quarter, the S & P 500 has popped 4.7%, while the Dow is higher by 7.7%. That performance paints a picture of a booming economy and soaring corporate profits under a Fed regime of lower interest rates. The bond market, however, is signaling something else, according to Cantor Fitzgerald’s Eric Johnston. “The bond market has the fed funds rate being cut below 3% in 2025,” Johnston, the firm’s head of derivatives and cross asset strategy, wrote in a note Monday. While some of that is due to inflation nearing the Fed’s 2% target on a month over month basis, “some of it also has to be economic weakness to come.” “The ultimate direction of stocks after the first cut depends on what happens with the economy and ultimately earnings and this is only known after the fact,” he added. “If the cut cycle coincides with an economy that stays strong, then that is a great back drop for equities. If the economy rolls over, then that overwhelms the cut cycle. This cycle we don’t think will be different in that the economic and earnings direction will be key for the direction of stock prices.” Earlier this month, stocks sold off and Treasury yields dropped as labor market data pointed to an economic slowdown. Equities and yields later recovered on the release of other figures indicating continued growth in the economy. .SPX mountain 2024-08-30 SPX in September Today, U.S. economic data continues to send mixed signals. On Monday, S & P Global said its U.S. manufacturing purchasing managers’ index fell to a 15-month low in September — while its services sector gauge showed expansion. Against this backdrop, Johnston recommends investors hedge their equity market exposure through options. He likes put spreads on the SPDR S & P 500 ETF Trust (SPY) expiring Oct. 31. Bottom line: One of these markets will be proven right. If history is any guide, it’ll most likely be the bond market.
