By now we all know the theory: QE is decreasing Treasury yields and forces money into risk assets like stocks. The Roubini's of the world tell us that when Treasury yields rise it will spell doom for stock prices.
But why? It doesn't make sense.
The Great Rotation hasn't even started. Look at fund flows if you question this fact. Mom and Pop are waaaay overexposed to BOND FUNDS (not BONDS). As yields rise, prices fall. Most normal people I talk to have NO IDEA this is the case.
Rising yields will make bond funds look far LESS attractive to retail investors. Yet the consensus seems to be that rising bond yields will be MORE attractive after Mom and Pop eat significant losses in their bond funds. How does that make sense?!
Here's what will happen: Yields will rise as QE winds down and the economy improves. Always late to the party, Mom and Pop will see a significant loss of principal in their 401k's, and throw their money into the seemingly more attractive stock market at the worst possible moment, driving the stock market on it's final leg higher before the next bear market.
I don't know what the timing on this will be, but it'll happen. The only question is which side of the trade you choose to be on.