There’s an old axiom that international crises (e.g., the Latin American debt crisis, the Mexican peso crisis, the Asian financial crisis, and the European debt crisis) do not tend to lead to recessions and/or major crises within the United States; however, those that are homegrown do (e.g., the Fed-induced recessions through the 1980s-1990, the dot-com crash, and the subprime GFC), with COVID being the exception to the rule.
As far as the stock and bond markets are concerned, this may once again prove to be the case with regard to the war in Ukraine. Almost from the beginning of the conflict, the bond market has looked through the war, and has been overwhelmingly focused on inflation and the prospect for even more aggressive Fed tightening. For the equity market, however, fears about the war seem to have taken a little longer to be assuaged, but they too have now eased and the market has been steadily rising on the view that some of the worst case scenarios are off the table. Yet, unlike the bond market, equities are still seemingly less concerned about what the Fed is doing and any implications from those actions—as might have been hinted at with the brief inversion of the yield curve this week.
In this Economics Weekly, we discuss the seeming disconnect between the bond and equity markets and what this may be telling us with regard to future growth.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.