Watch The Fund Flows

Stocks are modestly higher this morning (Dow +36 points; S&P 500 +.2%; Nasdaq +.5%). Whereas many traders said the Fed rate cut would be a “sell the news” event, the opposite has been true. Since that announcement the S&P is up 1.7%. Bank of America says last week’s equity market inflows ranked third in the history of its data. On the bond side, we’re seeing a steepening of the yield curve. That means short-term bonds are rallying (pushing yields lower) and long-term bonds are trading flat-to-down (pushing yields slightly higher). This makes sense as the Fed has told us short rates are headed lower over the next year. The big takeaway is that the bond market, in tandem with monetary policy, is normalizing.

Over the past couple of years, investors concerned about the possibility of recession and put off by the 2022 bear market in stocks, have been hiding in CDs and Treasury Bills. But as bond yields fall, investors like Brian Belski of BMO are calling for a “major reallocation out of cash and fixed income…and into equities.” Josh Brown, CEO of Ritholtz Wealth says buying T-Bills at “5% was awesome, 4.5% is pretty good, 4% is not going to feel great, and 3.5%–which is where the betting markets are—is going to feel terrible, especially if the markets remain healthy and earnings [continue to] grow.”

Bloomberg News ran an article positing that the commercial real estate (CRE) market is “reaching a bottom.” Going back to 2022, collapsing demand for office space along with much higher interest rates created what many characterized as a slow-motion train wreck in CRE. Fear of financial instability spread to the banking sector, which holds a sizeable chunk of CRE loans. But although we’ve seen transaction volumes drop as well as a few high-profile defaults, the worst-case scenario for CRE hasn’t materialized. And now with falling interest rates and much lower prices, it probably won’t. Data provider MSCI Inc. says transaction volume is beginning to improve. Office property prices have stopped falling, and other CRE prices are rising again.