Markets Out of Sync? Treasurys, Dollar, and Gold Send Mixed Signals Amid Stock Market Rally
The S&P 500 is on the cusp of officially entering a bull market, finishing Monday nearly 20% above its April low, despite a recent U.S. credit downgrade by Moody’s. But not everyone is celebrating.
JPMorgan CEO Jamie Dimon voiced concerns Monday about “an extraordinary amount of complacency” in today’s fast-recovering markets. Echoing those sentiments is Lisa Shalett, CIO at Morgan Stanley Wealth Management, who warns that key parts of the financial ecosystem are flashing caution—particularly in contrast to the recent surge in equities.
According to Shalett, investors are shrugging off several significant disconnects across markets that could soon reassert themselves. Chief among them: Treasury bonds, the U.S. dollar, and gold.
1. Treasury Bonds: Rising Yields Signal Caution
While short-term Treasury yields reflect optimism about economic growth, the 10-year yield’s slow march toward 4.5% tells a different story. Shalett points to higher term premiums and rising real rates as signs that investors are concerned about the growing U.S. debt load and looming fiscal battles in Washington. With new budget and tax proposals potentially adding $2 trillion in debt, interest expenses could soar, pushing rates higher for longer—and putting downward pressure on equity valuations.
2. U.S. Dollar: Weakness Raises Red Flags
The dollar has fallen 8% against major currencies since early January, a surprising move given the stock market’s strength. Historically, oil and the dollar move in opposite directions, but they’ve recently become positively correlated. Shalett believes this unusual dynamic, driven by shifting global reserve allocations and capital flows, suggests the dollar may be entering a prolonged period of weakness. That could lead to reduced foreign investment in U.S. assets and lower stock valuations.
3. Gold: Outpacing Stocks Since 2022
Gold has been outperforming equities since 2022, an unusual trend during what many are calling a bull market. Shalett sees this as a sign that central banks are diversifying away from the dollar, a move that further undermines the perceived safety of U.S. assets. “Gold’s strength, independent of risk-off sentiment, highlights cracks in the traditional safe-haven structure,” she said.
A Return to Reality?
Shalett warns that investors counting on a repeat of the 2023–2024 “Goldilocks” environment—low real rates and a strong dollar—may be setting themselves up for disappointment. Instead, she expects average equity returns in the 5%–10% range, tempered by structural volatility, elevated real rates, and currency pressures.
What to Do Now
Her advice: Use current market strength to rebalance portfolios. Favor international equities, commodities, and energy infrastructure. Consider hedge funds and stay overweight on short- to neutral-duration investment-grade and municipal bonds.
“This is not the time to bet on further valuation expansion,” she said.
