The market is currently acting in unusual ways. It's worth noting and thinking about to try to understand if it's the beginning of a new regime or an anomaly that is signaling some sort of market stress underneath the surface.
Bonds vs Stocks
Typically, stocks and bonds trade in opposite directions. When market participants become convinced that growth is on the horizon, they sell bonds and buy stocks. Bonds have lower risk and generate a fixed amount. Thus, they are bought when growth prospects are diminishing. In that environment, demand for a fixed return with lower levels of risk naturally increases.
So, the current situation is quite unusual. Basically, stocks and bonds are both at all-time highs. It doesn't make sense from the traditional perspective when bonds and stocks traded inversely. However, it's possible that both stock and bond investors' bullishness could be proven correct if the economy continues to slow but not enough to be contractionary, and monetary policy gets even looser with more cuts and asset purchases.
Defense Stocks vs Growth Stocks
Consistent with the slippage in growth and inflation expectations, cyclical stocks and commodities have been weak especially since the start of the year. However, the broader stock market remains strong. The strongest parts of the market are growth stocks and defensive stocks.
This is also contrary to normal behavior when these sectors trade inversely. Growth stocks tend to be priced at a premium so failure to meet lofty expectations can result in the stock being crushed. And this is more likely to happen in an environment when economic growth is faltering. When investors anticipate growth slowing, they pile into defensive sectors like aerospace & defense; consumer staples; and utilities. These businesses are unlikely to be majorly disrupted by a recession and certainly less than other industries.
So far, growth stocks have been able to continue growing in this environment, but falling interest rates and economic concerns are driving up the price of defensive sectors as well.
Gold vs the Dollar
Another anomaly is the strength in gold (NYSE: GLD) and the dollar (NYSE: UUP). These typically trade inversely as gold is priced in dollars. Things that weaken the dollar like inflation and lower interest rates are bullish for gold prices. So, it's interesting to note that both gold and the dollar have been in bull markets since mid-2018.
The decline in interest rates and inflation expectations are driving gold higher. The dollar has also been resilient despite bullish risk appetites and seems to be gaining strength in recent days. One potential narrative to explain this divergence is that the market is anticipating more weakness, monetary intervention and that it won't be sufficient.