We are in an interesting time for equity investing because productivity is stuck in a rut, yet stocks are levitating higher. Since productivity growth drives economic growth, there’s no way stocks can rally in the long-term without it. I think both will correct as productivity growth will likely revert to the mean, possibly due to Trump’s deregulatory efforts; stocks will fall back down to earth reaching median multiples once again. In this article, I will review the latest charts which show how weak productivity is and how high the stock market has risen.

First, I will look at what I consider to be the most important chart in the markets. The chart below is the 10-year bond yield which has risen above, what Bill Gross has called the critical 2.60% level. It is about 2 basis points away from the high that was reached in December. Yields rising is a part of the Trump trade which also has included stocks rising, inflation expectations rising, and the dollar rising. The 10-year has risen about 30 basis points since February 24th. I remember asking others in finance why the 10-year was falling considering the Fed was about to raise interest rates and the stock market was hitting all-time highs. One possible justification was the bond market didn’t believe in increasing inflation expectations.

In analyzing the declining 10-year bond yield I felt it wasn’t ‘telling the truth’ and would follow the other assets classes soon. The caveat to my near-term expectation was that inflation expectations could fall if oil prices fell. This makes the current movement confusing because oil prices have fallen, yet the 10-year yield has risen. Inflation will come down if oil prices fall to the high $30s. The two-day sell off hasn’t yet influenced anything; the trend would need to be more sustainable. The strength of the summer driving season will start to effect oil prices in the medium-term. It will be interesting to see how oil prices effect inflation in the EU and the U.S. The E.U. has seen inflation surprises increase as you can see from the chart below. Looking at the low core inflation shows energy has had an undue influence on E.U. inflation.