Economist David Rosenberg warns that the surging bull stock market has created a false sense of security for investors.
Gluskin Sheff's Rosenberg, one of the first Wall Street strategists to turn bullish following the 2008 financial crisis, says investors could be taking on a lot more risk than they think by pouring money into U.S. equities, CNBC.com reported.
CNBC explains that an “an anomaly continues in the market. Bond yields, a ‘safe haven’ asset, have been falling while stocks have been rising.”
"We all have to make up our minds as to which of these two asset classes has the right story," Rosenberg recently told CNBC.
"It reminds me of the period in the fall of 2007 when the stock market was putting in a classic double top, and everybody thought that we were going to have the longest cycle on record. The bond market was telling you a different story altogether."
In a recent research note, Rosenberg wrote: "Mr. Market spent most of 2000 and most of 2007 in similar denial mode." Within a year, a recession hit the U.S. both times, CNBC explained.
"The stock market is telling you that we're going to have a pickup in growth, reacceleration alongside pricing power throughout most of the economy," he said. "I think that really is going to be the part of the story that's got a low odds scenario attached to it," he said.
"I think the bond market is just basically responding to an economy that isn't really showing a whole lot of verve," said Rosenberg.
"And inflation data is coming in on the low side. So, I don't think the bond market is telling you an inconsistent story here. ... If you're taking a look at who's the odd man out here, it seems to be the stock market action that we're seeing."
To be sure, U.S. stocks extended their losses in early afternoon trading on Tuesday, slipping from record levels, as a sharp drop in oil prices squeezed energy stocks and a rebound in technology shares faded out.
Oil prices nosedived to seven-month lows after news of increases in supply by several key producers, a trend that has undermined attempts by OPEC and other producers to support the market through reduced output, Reuters reported.
"Oil prices are now approaching bear market territory and that, psychologically, has a big impact on Wall Street," said Adam Sarhan, chief executive officer at 50 Park Investments in Florida.
"If oil prices collapse, the message the oil market is sending is that demand is drying up and global economic growth is waning."
A recovery in technology stocks also appeared to have lost momentum, adding to the overall weakness.
"Investors are hunting for value and while the 'buy-the-dip' crowd showed up when tech stocks fell, we are seeing a mini-rotation among sectors where underperforming sectors such as healthcare and biotech stocks are being snapped up right now," said Sarhan.
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