A Tale of Two Markets, Two Economies


“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair…” – Charles Dickens, A Tale of Two Cities

I can’t think of a better quote to describe the current state of the financial markets and the economy.

Two Markets

If you’re looking only at large-cap U.S. stocks, it is the best of times, the age of wisdom, the spring of hope. New all-time highs are more frequent this year than any since 1929. Over the past month, they have been registered on an almost daily basis as the Dow races towards 18,000.


Meanwhile, bond market participants have been acting as if this is the worst of times, the age of foolishness, the winter of despair. This is best illustrated in looking at the enormous performance disparity in 2014 between the defensive Treasuries and higher risk areas of the market.

In the chart below, you’ll notice that long duration Treasuries (TLT) are up over 23% this year while High Yield bonds (JNK) and Senior Loans (BKLN) are barely positive.


Inflation expectations are also falling,  now back to March 2009 levels, as investors seem to be anticipating another deflationary pulse to come. Three rounds of quantitative easing (QE) and six years of 0% interest rates have failed generate sustainable growth expectations.


Two Economies

For the ultra-rich, it is the best of times. The share of wealth owned by the .1% is now almost the same as the bottom 90%, reminiscent of the “Roaring Twenties” In everything from New York City apartment prices to fine art to vintage cars and other collectibles (the toys of the uber-wealthy), records are being set.


Meanwhile, according to a recent Fed study, the bottom 40% of families in the U.S. have actually seen their incomes decline over the past four years. For these families and most of the middle to upper middle class as well, it has been among the worst of times as the cost of health care, education, and rent continue to increase while this has been the slowest wage growth recovery in history.


The Best of Times or The Worst of Times?

Which is a more accurate depiction of the current state of affairs, stocks or bonds? It depends. If you are a member of the .1%, it is most definitely stocks. This is no coincidence as the ultra-rich have a large portion of their wealth in stocks and disproportionately benefit from easy money central bank policies in place to drive stocks higher. The Fed’s “wealth effect” theory may be working as it pertains to this small group.

For almost everyone else, the bond market, low interest rates, and low inflation expectations are a more accurate representation as they indicating lower growth. One could argue that easy money policies and negative real interest rates after six long years are doing more harm than good for this group as wage gains fail to keep pace with higher inflation and companies are disincentivized to invest in their employees.

From a market perspective, if bond market participants are indeed the “smart money,” equity investors would be wise to take notice of what’s going on today. You have a complete lack of risk appetite within bonds that has in the past led to higher volatility in stocks.

Heading into 2015, this will be the key issue for investors. Will the growing divide between the bond market and stock market (which is to say the economy and the stock market) continue to widen on hopes of continued monetary easing or will it finally close and do so in dramatic fashion?

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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