Bonds' reaction to the Fed's pronouncements

So far I can say, with a lot of humility I may add, my scenarios are playing out.
The Fed is recognizing the economy is not as strong as they thought. The previous posts tell you my expectations.
The outcome today was that stocks soared expecting more easing from the Fed. The much more important and reliable event was the sharp decline in Treasury bond yields. See above chart (click on the chart to enlarge it).
Their move suggests the bond market thinks the economy is weak (copper and lumber declined). If so, earnings this year cannot support a strong equity market.
This is not a prediction. It is a scenario I am looking at very seriously. Is it going to play out?
I know per sure lower yields are not a positive development for stocks. A weak economy is bad news for commodity and commodity-sensitive stocks. If commodities keep heading lower, inflation, which is now slowly morphing into deflation, will keep declining. Lower inflation reduces the inflation premium in bond yields.
I know, this is a lot of stuff to digest. What I am really trying to say is the business cycle is alive and well, as I discussed in my book Profiting in Bull or Bear Markets
My motto is ....the markets always win. We are witnessing this phase of the business cycle.
As always, time will tell.
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George Dagnino, PhD

The Peter Dag Portfolio
Since 1977
Author, Profiting in Bull or Bear Markets
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