Why Are Investors Pricing In A Slowdown?
Michael Lombardi | Aug 11, 2014 03:19PM ET
The Bureau of Economic Analysis (BEA) surprised even the most optimistic of economists when it reported the U.S. economy grew at an annual rate of four percent in the second quarter of 2014.
On the surface, the number -- four percent growth -- sounds great. But how serious should we take that gross domestic product (GDP) figure?
First, it's important to remember that the BEA often revises its GDP numbers down. We saw it in the first quarter when the BEA said that the U.S. economy grew by 0.1% in the first quarter. Then after a couple of revisions, they said the economy actually contracted by 2.9% in the quarter.
I obviously expect the BEA to lower its initial second-quarter GDP numbers again.
But here’s what really worries me: If GDP data suggests the U.S. economy is growing, why are investors pricing in an economic slowdown?
The chart below is of the 10-Year U.S. Treasury -- the so-called 'safe-haven' bond. As the U.S. economy improved, the yields on the 10-year U.S. Treasury started to rise as interest rates rose with general optimism toward the economy.
Chart courtesy of www.StockCharts.com
But since the beginning of this year, yields on the 10-year U.S. note have declined 18%, despite the fact that the biggest buyer of those bonds -- the Federal Reserve -- has reduced its buys of these Treasuries as it winds down its quantitative easing program.
At the same time, the stock market is finally starting to give in. And if the market for stocks is a leading indicator -- it's down four percent this year based on the Dow -- and the yield on the 10-year Treasury reflects a slowing, not a growing, economy, how can we have GDP growth of four percent? Just doesn't make sense.
Bottom line? The U.S. economy is getting softer in 2014, not stronger.
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