Bond buying went to far too fast, and if they consolidate, stocks are likely to consolidate as well, said Chief Strategist Dhaval Joshi in a BCA Research strategy report published Wednesday.
BCA Research analysts said they are bullish on bonds (NASDAQ:TLT) but given Fed Chair Powell’s latest comments about not yet declaring victory, the bond market rally “warrants a neutral stance.”
“The markets have been celebrating the killing of inflation without the killing of the economy, but they have popped the champagne corks prematurely.”
Joshi explained that a bullish stance to bonds hinges on central banks “not letting inflation stabilize at a level meaningfully above 2% and slip-sliding into an era of inflation akin to the 1970s.”
Analysts expect a near-term consolidation of bonds.
“While the S&P500 has grabbed the headlines for reaching an all-time high, the post-October rally is mostly on the coattails of the bond rally,” Joshi said. “So, if bonds consolidate, stocks are likely to consolidate too, also warranting a tactically neutral stance.”
In addition, the USD/EUR (USD:EUR) is expected to rise since the Fed’s rate cuts are being pushed further than the European Central Bank’s cuts “and/or because any consolidation or sell-off in stocks will favor the haven greenback.”