Buoyant U.S. stocks at odds with downbeat market signals

FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., June 17, 2019. REUTERS/Brendan McDermid/File Photo

NEW YORK (Reuters) – Even as record highs this week in the major U.S. stock indexes telegraph confidence on Wall Street, caution abounds in other U.S. markets, where falling bond yields and flailing small-cap stocks indicate investors are torn about where to place bets.

Hints from Federal Reserve policymakers that the central bank will cut interest rates have buoyed both U.S. stocks and Treasuries. The S&P 500 .SPX, the Dow Jones Industrial Average .DJI and Nasdaq .IXIC have all notched new highs this week, while yields on the benchmark 10-year Treasury note dropped below 2% to their lowest since late 2016.

Rate cuts often occur in response to signs of emerging economic weakness, which is ultimately negative for equities. Yet lower interest rates are considered supportive of stock valuations by stimulating corporate earnings and capital spending as borrowing costs for companies fall. Such a conundrum was evident on Friday as stocks fell in response to stronger-than-expected U.S. payrolls data, which dampened expectations of a Fed rate cut.

The conflicting signals have given a bid to stocks in defensive sectors such as real estate and consumer staples, yet investors say they are hesitant to abandon cyclical plays, in the event of Fed rate cuts and a trade truce between the United States and China.

“Investors have got to be nuanced,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments in Edinburgh, Scotland. “I wouldn’t disagree with being pro-cyclical or pro-yield.”

It will likely take several months of economic data – along with results from the corporate earnings season later this month – to clarify the picture, investors say. In contrast to Friday’s upbeat employment report, data earlier this week showed U.S. manufacturing and service activity in June declined to multi-year lows.

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