The U.S. markets keep showing signs of returning back to normal, says Goldman Sachs Asset Management Chairman Jim O’Neill in his latest note, pointing to “breakouts” including positive jobs data three months in a row, the S&P 500’s rise above 1,400, a drop in gold prices and, particularly, good news from the Federal Reserve.
In short, U.S. stocks are going up while bonds are going down, and all is well in creation.
“Whisper it, but in addition to many things developing the way I had expected, the markets are showing some signs of a return to normality,” O’Neill wrote on March 17 in The Beginning of a Return to Normal? “Probably a most important development for the change in correlations, U.S. bond prices fell as market participants reassessed the profile of the Fed’s future monetary policy.”
O’Neill followed his positive assessment with the warning that the greatest risk to U.S. markets would be a stampede out of bonds if investors suddenly agreed en masse that the economy was indeed back to a state of normalcy.
“Of course, one has to be on the lookout for all of the things that could go wrong, of which there continues to be no shortage,” he wrote. “Amongst these potential pitfalls are the implications for bond markets if everyone suddenly decided that, indeed, the U.S. (and Fed policy!) is returning to normal.”
O’Neill said the Fed in its last two meetings has revealed plenty about its monetary thinking. Presumably, he said, normalcy involves a federal funds rate in the vicinity of 3.5% to 5%. A jump in two-year note yields from the low 0.20% range to about 0.40% this past week signals “a true shift in confidence,” he said.