The million-dollar question: "Gloomy bonds vs optimistic stocks", column by dutch economist Corne van Zeijl

I'm posting this because I was thinking the same before I read this. It's google translated, but it holds up well:

Corne van Zeijl

Gloomy bonds vs optimistic stocks

Bond investors often see the future somewhat gloomy. If you are very optimistic about the future, you invest in stocks. At least there's a big upside in that. With bonds you receive a modest interest payment if things go well, but if things go wrong you lose your money. Just ask Credit Suisse subordinated bondholders. When I see what expectations are priced into the bond market, the gloom is dripping off. In the United States, the Fed is expected to cut interest rates sharply in the course of the year. Before the banking crisis, a Fed interest rate of 5.5% was still assumed at the first meeting of 2024. Now only 4.2%.

That is a special scenario. It doesn't seem logical. The Fed itself also assumes that interest rates will remain high for the time being. A longer period of time in which the Fed holds the pause button is more realistic. The Fed will first want to see how inflation develops. Of course inflation is going down. But the question is how fast? There are plenty of second-order effects, or derivative effects. In the Netherlands we have the example of healthcare workers. They just gained 15%. I wish everyone a big salary increase. But who's going to pay for it? The premium for health insurance will therefore rise and that will drive inflation. So everyone wants more salary again. And so on, and so on.

It is of course possible that the gloomy bond investors will be proven right. But that requires a dark scenario. For example, a scenario in which the fear of even more failing banks continues. Then the Fed could help by cutting interest rates. Or a scenario in which the economy goes down hard. In that case, the Fed need not be so afraid of high inflation and the arrows will be aimed at saving the economy. Keep in mind that the Fed mainly looks at employment. And it's still excellent.

Equity investors, meanwhile, are only seeing the positive side of this lower interest rate. The negative consequences of the banking crisis are carelessly brushed aside. In 2008, the world stock index halved. In the current banking crisis, there was a short correction of only 5%. Analysts already see a strong recovery in profits at the end of 2023. While the economy will suffer considerably from the decline in lending. And wages will also eat up a large chunk of the profit pie.

It seems that equity investors only want to see the bright side, while bond investors only see dark clouds on the horizon. But only one of the two is going to be right. And if the truth is somewhere in the middle, they will both be disappointed.

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Corné van Zeijl is an analyst and strategist at asset manager Actiam and also invests privately.

source: https://fd.nl/financiele-markten/1472221/sombere-obligaties-vs-optimistische-aandelen-o3c3cazbOHw9