The stock market says that the Fed will soon lower its rates. Maybe that’s right.

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The stock market has recently been fairly quiet, rising slightly despite the usual drag from high interest rates. What those who say the current rally can’t last misses is that it’s a signal that rates may soon come down.

THE

S&P500

is up about 20% from its bear market low in early October. Much of the recent gain has come from Big Tech stocks, which are benefiting from the advent of artificial intelligence.

But even before that, markets were hoping the Federal Reserve would soon halt in raising interest rates as inflation and economic growth slowed. An end to even temporary rate hikes would help economic growth stabilize, with positive results for corporate earnings and stock prices.

As investors anticipate calmer waters for the market, the

Cboe Volatility Index

(VIX), a measure of expected stock price volatility known as the Wall Street Fear Gauge, has fallen from a high of around 32 in October to around 13. It is now near its low level since just before the March 2020 lockdowns.

The bond market reflects a less optimistic view. The MOVE index, which measures bond market volatility, is at 115, down a bit in recent months but well above its all-time low of 36 hit at the end of 2020. It has not fell alongside the decline in the stock market. volatility, reflecting fears that the 10 interest rate hikes the Fed implemented from March 2022 could wreak further havoc on the economy.

A tighter monetary policy usually takes effect on the economy with a delay. And with the Fed’s target for the federal funds rate at 5%-5.5%, borrowing costs are high.

This is why many now doubt the stock market. THE

S&P500

is now trading at a high level, which puts it at risk, especially since safe Treasury debt is yielding much more than before, leading some to wonder how one can continue to buy stocks at these levels . And sure enough, the stock market could see a correction if a recession proves harder than expected for corporate earnings, a dynamic that could push money into bonds.

“Now is the time to shake the tree a bit to wring out some of the complacency that all will be well despite fiscal restraint, quantitative tightening and various economic challenges that will not change for some time,” Peter Boockvar wrote. , Chief Investment Officer. officer at the Bleakley Advisory Group.

But there is a rhyme to the stock market reason.

One of the best explanations for the stock market calm is that investors are anticipating lower rates. It is possible that the Fed will cut rates later this year, given that inflation has been cut by nearly half in about a year. Looser monetary policy could help the Fed steer the economy toward a soft landing.

Even if there are no cuts soon, a pause in rate hikes could push the 2-year Treasury yield down a bit, making equities more attractive.

It is not the first time that the stock market has calmed down while the bond market has acted. There were several periods of months between the financial crisis of 2008-2009 and the pandemic, when the stock market became calm and the bond market remained volatile, according to RBC.

“It’s not unusual for the VIX to fall ahead of MOVE,” wrote Lori Calvasina, the company’s chief US equity strategist.

When a stock market rally seems hard to believe, take a closer look at the reasons. There may be a message there.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com