Breakout

Is the Bond Market Signaling the End of the Equity Rally?

Breakout

Lincoln Ellis of the Strategic Financial Group says the disconnect between stocks and bonds is getting more troublesome with every uptick, creating a market tension likely to end in tears for equities.

A quick review for those who don't spend their free time studying the way markets are supposed to work. Financial assets are all priced relative to the cost of "risk-free money" as represented by U.S. debt. When rates are low investors seek better returns by buying risk assets like stocks and corporate bonds. The Fed has kept rates at essentially zero for five years and counting. Once the stimulus ends, rates will rise and investors will sell risk assets and go back into government securities.

Cut that paragraph out and pin it to your wall. Whenever you hear an economic type person fretting over the fate of stocks once Bernanke removes the punch bowl / heroin / speed or "stops the printing presses" it's that to which he or she is referring.

Of course, the inevitability of stimulus going away has kept many funds and individuals on the sidelines for a better than 100% rally. With corporations now swimming in liquidity and the Fed vowing to keep rates "accommodative" until the economy improves, the question is whether or not all this hand-wringing is justified.

The bullish case is that corporations are sitting on more cash than ever and productivity is at record highs. The problem is they aren't putting the money to work because, as Ellis puts it, they're still gun-shy about consumer end demand.

"We shouldn't be surprised if we see equity prices come off a little bit as we interest rates rise," Ellis notes, quickly adding the alternative of "simply trading sideways for the next two or three years."

Rates

View Comments (89)