Stocks and bonds rebounded sharply in January as investors upped bets on a so-called soft landing in the economy. Expectations of falling inflation without a serious recession led to a flurry of dip buying, notably in the hardest-hit areas of last year. Falling longer-term interest rates pushed up bond prices but imply low inflation and probably a recession are in the cards. Economic numbers are by and large very good, considering how fast interest rates have risen, but then it takes time for rate increases to help start a recession, historically.

November was a great month for pretty much anything that was down over 20% over the last year or so. This current stock market rebound started in late September and has boosted the S&P by over 10% from the lows of the year, and by even more for harder hit markets.

The hits to the bond market just keep on coming. Interest rates spiked up as inflation signs were alive and well, and the Fed hiked short-term rates by another 0.75%.

One problem with the “inflation is coming down soon theory so the Fed won’t have to go nuclear with rates” rosy scenario is that this indicates a weak economy. If prices stop going up with all the work at home and Covid productivity issues globally, then the consumer is tapped out and has cut demand to meet lower supply. How is that economy going to raise earnings to higher levels than the previous stock boom?