Understanding bear markets in bonds vs stocks and their relationship to rates.

Bonds are in a significant bear market. A bear market in bonds is different than the typical bear market we discuss – which is the stock market. While both are characterized by a drop in prices (for stocks it is typically 20%) – a bear market in stocks is typically accompanied by a declining economy and a bear market in bonds is typically accompanied by an overheated economy which is associated with an elevated threat of inflation. Note that the decline in bond prices means that rates are increasing.

Of course, these are not your typical bear markets. While stocks did fall from their peak in 2022 by more than 20%, they had risen over 50% in the previous four years and much of this increase was fueled by artificially low interest rates. As interest rates moved up to a more normal range, this stimulation was removed from the markets. Higher inflation caused by several factors, including these low rates, persisted and caused the downward momentum in bonds to continue to gather speed rather than leveling off.

Most analysts agree that we are either at or near the end of the Fed’s tightening cycle. And we had the government shutdown averted (for now) and some good inflation news. But bond market analysts are not looking at the “better times ahead” signals – another characteristic of a bear market. Possibly because every speech by the members of the Fed highlights that there is more work to be done in order to bring inflation under control. Moving out of a bear market outlook requires a change in perception. There is always that old market model – when there are no sellers left, the market will change. All bear markets end, and we hope that this bear market ends sooner than later because consumers could use some lower rates. And when they turn, they often turn quickly.