Bond Market Weakness Doesn't Mean Stocks Are Doomed

Here’s something to make you think twice about hitting the BUY button. The bond market isn’t playing along with stocks.

The Wall Street Journal says it’s a reason to question the rally, and that research shows that the bond market is a better forecaster than ststock market. So when bonds are slumping and stocks are rallying, then watch out stocks.

But the research isn’t perfect, and there have been several instances where the stock market didn’t confirm the bond market, but visa versa. So what’s happening? What are stock investors ignoring that bond investors are seeing?

Maybe that’s the wrong question.

David Goldman at AITimes has argued that money managers are playing both sides of the aisle. Basically, they’re betting that stocks will go up A LOT or go to zero. So they’re long stocks and shorting bonds (or buying up CDS).

This makes particular sense for bank stocks, which have been described frequently as options. If they survive in their current form, the equity could be worth multiples of what it is today. Or they could go bankrupt. In fact, it seems the least likely scenario for them is to be trading about where they are a year or two from now.

So contra the simplistic notion that bonds predict and stocks confirm, the divergence between the two asset classs may not be much of a divergence at all.

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