What Record Highs Might Be Hiding

PodcastOn InvestingLiz Ann SondersSep 25

The discussion examines how inflation breadth, persistent supply shocks, and labor-market resilience may shape the Fed’s rate path. Market breadth remains weak despite the S&P 500’s proximity to a record, with concentrated mega-cap contributions masking substantial drawdowns in the average stock. Colin also discusses Treasury yield drivers, bond maturity choices, and a gradually more positive view on long-term bonds.

Market Breadth Inflation Monetary Policy

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Key Takeaways

Colin says the Fed is watching inflation breadth—not just headline PCE—with New York Fed President John Williams looking for monthly core inflation readings of 0.2% or less to build confidence in progress toward the 2% goal. Colin also says sticky inflation, persistent supply shocks affecting inputs such as diesel, and a resilient labor market could leave the Fed room to raise rates gradually.

Saunders says the recent rise in the 10-year Treasury yield has been orderly, with a declining term premium and no meaningful deterioration in the growth outlook; Colin attributes the year-to-date yield increase mainly to changing expected short-term rates and higher global bond yields, rather than fiscal concerns. Colin expects the 10-year yield’s trend to remain higher but not rise significantly, and says it tends to peak closer to the final Fed hike than the first.

Saunders says the S&P 500’s near-record level masks unusually narrow participation: only 2% of stocks were at 52-week highs, while the average constituent experienced a 25% drawdown during the February–March correction, versus about 9% for the index. Mega-cap contributions helped support the cap-weighted index, and with only about 20% of stocks outperforming over the trailing month, Saunders says deteriorating breadth creates headwinds for active managers in aggregate.

ECONOMY

Inflation Breadth — Colin says the Fed will look beyond headline PCE to the breadth of price increases, including the growing share of PCE components rising at least 3% year over year.

“The first is breadth. So it's not just the one number we see. Okay, what was the month-over-month change in core PC for example or the year-over-year change?…”—

Inflation Threshold — Colin says New York Fed President John Williams wants monthly core inflation readings of 0.2% or less to build confidence that inflation is moving meaningfully toward the Fed’s 2% goal. A hotter reading could suggest that further rate hikes are necessary.

“where he said that in order to be confident that inflation is moving meaningfully towards its 2% goal, he'll want to see core inflation prints at 0.2% or less…”—

MARKETS

Yield-Stock Shifts — Lizanne Saunders says the relationship between bond yields and stock prices has shifted. From the late 1990s through the 2022 inflation spike—the Great Moderation—yields and stocks generally moved together as yields reflected growth. In the preceding “temperamental era,” they generally moved in opposite directions as yields reflected inflation, with higher yields tending to weigh on stocks.

“And in that era, bond yields and stock prices most of the time moved direction because bond yields were keying off of what was happening with economic growth…”—

Orderly Treasury Move — Saunders says the recent rise in the 10-year Treasury yield has been fairly orderly, the term premium has declined, and the growth outlook has not meaningfully deteriorated. She sees these as signs that investors are not yet demanding substantially higher yields to hold Treasuries.

“The one thing that gives me some comfort is that, first of all, I think the move in the ten years so far has been fairly orderly…”—

Treasury Yield Drivers — Colin says the ACM term premium has risen from its lows of years ago but has not meaningfully driven the year-to-date increase in the 10-year Treasury yield. He attributes the increase instead to changing expectations for short-term interest rates and a general rise in global bond yields, not primarily to fiscal concerns.

“So the ACM term premium, like you said, hasn't moved much…”—

FORECASTS

Yield Peak Timing — Colin says the 10-year Treasury yield’s trend is higher, but they are not expecting a significant rise. He points to the Fed’s recent hike and expected further hikes, sticky inflation, and a resilient economy. He says the 10-year yield tends to peak closer to the final rate hike than the first.

“The trend is higher right now. Not that we're expecting yields to move significantly higher, but the Fed just hiked rates with a few more expected. Inflation is still sticky…”—

Bond Yields And Stock Prices

Lizanne connects the shift toward an inverse relationship between yields and equities to inflation risks, while Colin explains that recent Treasury yield gains largely reflect rate expectations and resilient growth rather than a rising term premium.

Treasury Term Premium

Colin defines the term premium and says commonly followed estimates have not risen much, suggesting fiscal concerns are not the main driver of the recent increase in long-term yields.

S&P 500 Market Breadth

Lizanne says the index’s near-record level masks weak breadth: few stocks are reaching new highs, average-stock drawdowns are severe, and mega-cap technology names account for a disproportionate share of gains.

Active Investing And Concentration

Lizanne says deteriorating breadth has made results harder for active strategies in aggregate and recommends longer horizons and disciplined rebalancing to avoid excessive portfolio concentration.

Bond Maturity Choices

Colin favors short- and intermediate-term bonds tactically over cash or an all-in move to long bonds, while acknowledging that longer maturities may suit investors whose goals can be supported by current yields.

Jobs And Inflation Data

The hosts preview employment, housing, and PCE releases; Colin emphasizes inflation breadth and core monthly readings, while resilient labor conditions could leave the Fed room to keep raising rates.

Diesel And Supply Shocks

The hosts warn that diesel costs matter across the physical economy and that frequent, persistent supply shocks make inflation harder for the Fed to overlook, before closing with listener resources.