We saw something very unusual in November: both stocks and bonds had record months!

    This Reuters article – Average 60/40 portfolio has best month in November since 1991 – BofA – explains that investors with the “classic” 60% stocks/40% bonds portfolio saw their best month in 30 years.

    This phenomenon is so unusual because bonds perform well when rates are expected to drop, and stocks do well when the economy is expected to grow.

    But, the problem is that rates tend to drop when the economy is NOT doing well.

    So – what gives, and who’s wrong?

    What gives is that many stock investors believe the Fed has pulled off a miracle – raising rates just enough to kill off inflation, while NOT killing off the economy at the same time.

    This Business Insider article says it all: After 3 years of pain, America has finally achieved economic nirvana, and I can easily find dozens of other articles with similar messaging referencing a “nirvana” or “Goldilocks” economy.

    Stock investors seem to believe that the Fed will be able to gently lower rates and that in turn will spark another growth and stock market boom.

    What stock investors seem to forget is that the Fed usually does not lower rates for no reason; the Fed lowers rates in response to severe economic concerns.

    And those economic concerns often result in much lower growth and stock prices. The chart at the bottom of this blog compares stock prices to the Fed Funds Rate, clearly showing how often stock prices plunge along with the Fed Funds Rate.

    There is an old saying that “the smart money is in bonds.” That “smart money” is not betting on the Fed lowering rates, but instead it is betting on much slower growth and lower inflation (if not deflation), as those are the criteria bond investors look at much more than expected Fed policy (according to macro analysts like Alf Peccatiello, George Gammon, and Jeff Snider). Bond investors are also betting the Fed will lower rates, but only in response to slower or even negative economic growth.

    Rosie Gets Ridiculed

    David Rosenberg was on last week’s Macro Voices podcast, again illuminating all the reasons why he thinks a recession is either here or imminent. Rosenberg is a prominent and respected economist with a very long track record, and he lists the usual litany of reasons why so many analysts expect a recession and why we’ve avoided one so far, defying so many predictions (I recommend reading this blog of mine, explaining why I and others were so WRONG: Why I Was So Wrong About Rates). In any case, Rosenberg lists all of the usual reasons why he thinks we are or will be in a recession, such as consistently falling Leading Economic Indicators, lag effects from massive rate increases, falling oil prices in the face of supply cuts, tight bank credit/no lending, and falling inflation – among other things.

    It is the comments under the video that are so fascinating though, as many of them just shred poor Mr. Rosenberg for being wrong.

    What is even more fascinating to me though is that Mr. Rosenberg endured that same ridicule in 2007 when he was predicting the 2008 meltdown.

    It will be very interesting to see who ends up correct because many people are going to be very wrong – and the losses will be in the trillions.

    I of course remain on “team-bond-investor,” but remain ready for anything.

    Stock investors might be wise to remember too that stocks don’t always do well when the Fed lowers rates.

    S&P 500 vs. Fed Funds Rate

    S&P 500 vs. Fed Funds Rate Chart

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