Something unusual is happening in financial markets, and it could mean more gains lie ahead for stocks, if history is any indication.

The S&P 500 and long-term bonds are both up more than 5% to start off 2019, marking just the 10th time since 1980 that stocks and bonds kicked off a year on such a strong note, according to data from Bespoke Investment Group. The data also shows the S&P 500 averages a gain of 11.3% when stocks and bonds get off to such a hot start.

Sharp gains in both equities and fixed income are unusual since rising bond prices — or declining yields — are usually seen as a signal that an economic slowdown looms ahead. Bonds are seen as a safe haven in times of economic turmoil. Stocks, meanwhile, usually produce much higher returns than bonds when the economy runs smoothly.



Hopes for Fed rate cut

But this year is now all about the Federal Reserve. Investors have been plowing money into both stocks and bonds in bets the Federal Reserve will reverse on monetary policy, bringing rates down to boost the economy.

Bonds have risen all year “despite a stock market which continues to trend higher. The stock market appears optimistic about the future of this recovery, whereas the bond market is acting increasingly nervous,” said Jim Paulsen, chief investment strategist at The Leuthold Group, in a note. Determining which market is right “is a tough call, but for equity investors we continue to lean toward the view that what doesn’t kill you will likely make ‘the stock market’ stronger.”

The trade war could also be influencing the correlation between the two markets. Stocks are still holding out hope there will be a trade deal, while bonds are reflecting the damage already wrought by the tariffs in place, and perhaps a greater fear an agreement may take longer to hatch.



Recession risk

Neither a Fed rate cut nor progress on the U.S.-China trade front are a sure thing, however. The Fed could reverse course on cutting rates if U.S. economic data improves between now and its July 10 meeting.

Recent economic data has been lackluster at best. If it’s just a soft patch that can be fixed by slightly lower rates, then the run in both markets at the same time will be justified. But if the economy turns into a recession, bonds may keep going higher while stocks fall.



Reference: CNBC