Today I am seeing a rather interesting divergence between the bond market and the stock market. We have yields going down and the market rallying. Typically in early stages of an expansion yields and the stock market are positively correlated as higher yields mean more growth and that is also good for the market.
Today you have yields falling which is an indication of slower growth whereas the stock market is holding strong.
The explanations I can come up for this divergence is
- Yields are coming down due to a sluggish domestic economy but stocks are rallying because of stronger international prospects and benefit of a weaker dollar on earnings from foreign operations.
- A late reaction to the Bernanke press conference which indicates short term rates will be low for some time
- Another just technical explanation could be that stocks have hit new highs and you are just getting a continuation of the momentum. Stocks could be going up because of earnings related news and not focused on macro issues, whereas the bond market is always focused on the macro issues.