Oct 3, 2019 - Economy

The stock market is overreacting

Illustration of stock market numbers overreacting

Stocks took a nosedive for the 2nd consecutive day on Wednesday and the Dow and S&P fell for the 4th time in 5 sessions. But the U.S. Treasury market experienced a far smaller move, as it has been factoring in manufacturing weakness and slowing job growth for months.

Why it matters: The bond market's limited movement in the face of historically weak manufacturing and deteriorating employment data suggests the worst may be over, analysts say.

What's happening: Bearish investors appear to have seized control of stock markets and are now pricing in the effect of the already-in-recession manufacturing sector. While the Dow fell by nearly 500 points on Wednesday, the benchmark U.S. 10-year Treasury note yield dipped just 5 basis points.

  • "The bond market has been more pessimistic about the economy than the stock market for a while, and really the only data that has come out particularly weak has been the manufacturing numbers," Tom Simons, money market economist at Jefferies & Co., told Axios.

Reality check: Jobs, consumer spending and the all-important services sector, which represents around 70% of the U.S. economy, have largely held strong.

  • "There’s certainly a lot of downside risks, but data suggests [the economy is] still growing," Simons added.

Between the lines: Treasury yields have been incrementally moving lower throughout the year as traders have poured into bonds, correctly betting that U.S. economic data would continue to weaken and the Fed would cut overnight interest rates and ease policy.

  • Stocks, on the other hand, have largely ignored the economic data, moving higher on positive trade war headlines, however thin, and hopes that monetary policy would boost business balance sheets.
Data: U.S. Treasury, Yahoo; Chart: Andrew Witherspoon/Axios
Data: U.S. TreasuryYahoo; Chart: Andrew Witherspoon/Axios

Historically, as U.S. stock prices rise, Treasury yields increase as investors sell bonds to buy equities. But that has not been the case over the past year.

The bottom line: With more important data releases to come this week, the stock market may continue to be volatile. But the Treasury market has proven a better representative of the real economy this year and may have found a floor.

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