U.S. Markets Rebound Despite Economic Concerns, Investors Remain Cautious

In recent weeks, the U.S. financial markets have exhibited a strong rebound, with significant gains observed in the U.S. stock market, U.S. Treasury bonds, and Bitcoin. The benchmark 10-year U.S. Treasury yield has decreased by over 20 basis points in the past two weeks, easing concerns about a large-scale withdrawal of foreign capital and stabilizing the U.S. dollar exchange rate. High-yield bond risk premiums have also seen a reduction, indicating a more stable market environment.

Despite these positive developments, a group of seasoned investors who are adept at data analysis have chosen to remain on the sidelines, closely monitoring potential signs of an economic collapse in the U.S. These investors point to several indicators that suggest underlying economic weaknesses. For instance, there has been a decline in shipping volumes in Los Angeles, a reduction in tourism-related travel, and a decrease in credit card income in key consumer sectors. These factors have raised concerns about the overall health of the U.S. economy.

The rebound in the U.S. stock market, coupled with the stabilization of the U.S. Treasury market, has led to a decrease in corporate borrowing costs. This has provided some relief to businesses that were previously struggling with high interest rates. However, the skepticism among some investors persists, as they believe that the current market rally may be temporary and that deeper economic issues remain unresolved.

For example, Michael Mullaney, the research director of Boston Partners, a firm managing $110 billion in assets, has not joined the rally in risk assets. Instead, he is carefully reviewing various economic data points, concerned that they may indicate early signs of damage from the trade war. Mullaney notes that the impact of tariffs will not disappear within 90 days and that the economic activity will be significantly affected regardless of the final tariff levels. He has chosen to hold cash, despite the potential high cost of missing out on the current rally, as he fears that the effects of trade hostility may be deeply ingrained and difficult to avoid.

The recent surge in Bitcoin prices, which briefly surpassed $95,000, has added to the overall bullish sentiment in the financial markets. This surge has been driven by a combination of factors, including increased institutional investment and a growing acceptance of cryptocurrencies as a legitimate asset class. However, the volatility in the cryptocurrency market remains a concern for some investors, who are wary of the potential for sudden price fluctuations.

Economic indicators such as the number of container ships from China to the U.S. are showing signs of decline, which could lead to higher inflation for consumers and potential job losses in sectors like trucking, logistics, and retail. Additionally, the number of international tourists has decreased, which could further slow economic growth. These high-frequency data points suggest that the economy is slowing down, and the impact of tariffs on prices and quantities is expected to become more apparent in the coming months.

The probability of a U.S. economic recession within the next 12 months has increased from 30% in March to 45%. Consumer confidence has dropped to one of its lowest levels in recent times, and long-term inflation expectations have risen to their highest levels in decades. Corporate earnings reports have been mixed, with companies still uncertain about the impact of tariffs. The number of households seeking bankruptcy advice has reached its highest level since the pandemic, indicating increased financial strain on families. Tighter lending standards, mortgage rejections, and refinancing denials, coupled with a lack of fiscal stimulus, are contributing to this financial pressure.

Recent signals from the White House, including statements from President Trump and Treasury Secretary Mnuchin, have suggested a potential softening of the administration's stance on tariffs with major economic partners. However, these signals have been mixed, with Trump later indicating that he might not reduce tariffs on China and Mnuchin clarifying that the U.S. is not seeking unilateral tariff reductions. This policy uncertainty has added to market volatility, leading investors to adopt more defensive strategies. Some investors are using the market rebound to reduce their stock market exposure while maintaining a defensive posture in fixed-income investments.

In summary, while the U.S. financial markets have shown signs of recovery in recent weeks, there are still concerns about the underlying economic health of the country. Investors are closely monitoring key indicators and remain cautious about the potential for an economic collapse. The rebound in the U.S. stock market, U.S. Treasury bonds, and Bitcoin has provided some relief, but the skepticism among some investors persists, as they believe that deeper economic issues remain unresolved.