15 Wednesday, September 11, 2019 17:49

The Odd Reason the Stock Market Could Soar to New Highs

You could rightly say that this has been an interesting year for investors.On the surface, youd probably think that the broader market would be struggling. There are concerns about an escalating trade war with China, the yield curve has inverted for the first time since 2007, and just last week, the Institute for Supply Managements manufacturing index fell to 49.

1, signaling a contraction in manufacturing activity for the first time in three years. Yet the broad-based S&P 500 (SNPINDEX:^GSPC) is having an incredibly strong year, with a year-to-date gain of 18.8% through this past weekend. Despite the at-times sensationalist headlines, the S&P 500 ended the week a mere 47 points away from hitting an all-time closing high.

Image source: Getty Images.The oddball reason the stock market should hit a new high Although much of the talk of late has been about the recent yield curve inversion and the likelihood of a recession over the next 12 to 18 months -- every recession over the past 50 years has been preceded by a yield-curve inversion, albeit not every yield-curve inversion guarantees there will be a recession -- Im having different thoughts.

I believe the stock market is in prime position to thrive, if not soar to new highs, and it has an odd reason to thank for its catalyst: fear.First off, you have to understand that the stock market and the U.S. economy arent tied at the hip. Whats good for the economy isnt always good for stocks, and vice versa.

For example, on numerous occasions over the past year, weve witnessed the market sell off on news of stronger-than-expected jobs growth. The reason is that investors want the Federal Reserve to continue lowering the federal funds rate, which its less likely to do if economic growth, including jobs growth, remains robust.

Thus, theres been this bifurcation between economic news and stock market performance for some time now.This bifurcation is important to note, because it demonstrates that consumer and investor fear isnt necessarily a precursor to a poor-performing market.
Image source: Getty Images.The bond market will play a key role in pushing investors back into stocks However, its the bond market where fear will exert its greatest influence and help to push stocks to new heights.

With Wall Street clearly worried about trade-war escalation between the two largest countries in the world by gross domestic product (GDP), investors have been opting to buy U.S. Treasury bonds as a safe-haven investment. The thing is, bond prices and bond yields have an inverse relationship, meaning that as more investor money flows into bonds, yields decline.

Recently, the 10-year and 30-year Treasury notes hit respective three-year and all-time lows of below 1.5% and 2%.Now, heres where things get interesting. Although U.S. bond yields are still light years higher than the $17 trillion and counting in global government debt thats currently sporting a negative yield (ahem, Japan and most of Europe), most.


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