Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Forcing a Rethink of the Front End of the Yield Curve
Transcript
- Lucas: So the S&P 500 is sitting at seventy-four ninety, up one percent on the week, and the Nasdaq's up nearly two. But if you look under the hood, the real story this week isn't the tech rally — it's the front end of the yield curve. Luna: The front end. You mean the two-year Treasury and stuff like that? That's been so quiet all year. Lucas: Exactly. And the quiet is over. The Fed has held the funds rate at three point six three percent since June, and the market is starting to price a cut. The two-year yield has been creeping down, and that's a big deal because it tells you what the market thinks the Fed is going to do — not what they say they'll do. Luna: So when the two-year drops, it's basically the bond market saying, 'we believe in a cut.' And that's feeding into stocks, right? Lucas: Right. And it's not just a bond market thing. Goldman's traders are on pace for a record year, and the reports suggest a lot of that is coming from fixed-income trading — clients repositioning for exactly this scenario. When the front end moves, it ripples through everything. Luna: But the equity market still looks strong. The Nasdaq is up nearly two percent this week. How do you square that with a Fed that hasn't cut yet? Lucas: Because the market is looking ahead. The typical pattern in a bull market like this is that the front end leads. If the two-year is saying a cut is coming, then growth stocks — which are sensitive to discount rates — start to move first. You saw that in CrowdStrike, up six percent on the week, and Datadog, up six point four. These are high-multiple names that rally when rate expectations ease. Luna: But then why is Palantir down six point four percent? If rate cuts are good for growth, Palantir should be participating. Lucas: That's the nuance. The bull market is getting selective. Palantir had a massive run, and some investors are taking profits. Also, its valuation is so stretched that it's sensitive to any hint of a growth slowdown. The real GDP growth number we got for April came in at one point five percent annualized, down from two point one. That's slower growth, even if it's still positive. Luna: So the market is pricing in a cut because growth is slowing, but it's being choosy about which growth names it rewards. Lucas: Exactly. And that's why the front end matters so much right now. If the Fed cuts, it's not a panacea. It's a signal that they're worried about the economy. So the market is trying to figure out which stocks can grow even with slower GDP, and which ones were just riding the momentum wave. Lucas: This is actually one of my favorite parts of covering a mature bull market. In the early phase, everything goes up. Three years in, you have to look at the plumbing. Luna: Plumbing. You mean like the yield curve and the Fed's balance sheet. The unglamorous stuff. Lucas: The unglamorous stuff that drives everything. And speaking of unglamorous, we should mention something about this show. We deliberately don't run ads on these episodes — no sponsor reads, no midroll interruptions. It's a choice we've made because we want the conversation to be as direct as possible. If that's been valuable to you, the simplest way to support that choice is to buy us a coffee at buy me a coffee dot com slash fexingo. Just a small gesture that keeps this feed clean. Luna: Yeah, and we genuinely don't have a studio to maintain or a network to pay. It's just us and a microphone. So every coffee genuinely helps. Lucas: Right. Now back to the plumbing. So the two-year is the market's best guess at the fed funds rate in two years. When it falls, it's not just about one meeting — it's about the whole path. And that path is looking lower. Luna: And the ten-year? How is that moving? Lucas: The ten-year is a different animal. It's more about growth and inflation expectations. It's been range-bound, which is actually interesting. If the front end falls and the back end stays flat, the curve steepens — that's a classic signal that the market thinks the Fed will cut to avoid a recession, but that growth will recover. Luna: So a steepening curve right now is a bet on a soft landing. The Fed cuts, but the economy doesn't fall off a cliff. Lucas: Yes. And that's why the equity market is still holding up. The Russell 2000 is down a bit this week, but the big caps are fine. The market is positioning for a cut that keeps the expansion going, just at a slower pace. Luna: But what about the names that are down, like Shopify? It's off seven point seven percent this week. That's a big move for a stock that's been a bull market darling. Lucas: Shopify is a good example of the selectivity. It had a huge run, and when growth slows, investors question the multiple. It's not that the business is broken — it's that the bar was set very high. Same with Palantir. These are stories where the market is saying, 'show me the next quarter before I pay up.' Lucas: And that's why I think the front end is the key indicator to watch for the rest of this quarter. If the two-year keeps falling, that's a green light for growth stocks, but only the ones with real earnings power. If it stabilizes, we could see more rotation into value and energy. Luna: So the takeaway for a listener with a diversified portfolio is: don't just look at the S&P 500. Look at the two-year yield. That's the thing that's going to tell you whether this bull market has more legs. Lucas: I'd go further. Look at the two-year in relation to the ten-year. A steepening curve is your friend. A flattening curve is a warning. That's the kind of information that can help you decide between growth and value, or between adding duration and staying in cash. Luna: And with the Fed on hold and the market pricing a cut, it feels like we're at a pivot point. Not a bear market signal, but a transition. Lucas: Transition is exactly the right word. The easy money in the early bull market is gone. Now it's about being smart about where the next leg comes from. And that starts with the front end.