Weekly Risk Signals

This week’s signals continue to reflect the firmly bullish sentiment of investors. A lot of investors scoffed at the idea of the Fed’s “soft landing”, but the stock market is now pricing this in maybe not even as a possibility, but a probability. The range of possible outcomes seems huge. Conditions look very risk-on for now, but we need to see how the next couple months play out.

Last week’s better-than-expected jobs report added another boost of optimism to equities, but not to bonds. Under the surface, the jobs report looks weaker than the headline number. Short-term conditions are still favoring riskier assets, but the foundation for this modest strength continues to waver. There are two big data points to watch here.

Stocks and bonds are moving higher together, but for different reasons. The bond market is thinking about recession and is probably sensing a deflationary cycle ahead. The rally in stocks has been a nice relief for investors, but I don’t think it has legs. Short-term sentiment looks a little more balanced, but conditions are still trending in the wrong direction.