The bond market broke the recession. So why is the stock market booming?

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The S & P 500, Dow and Nasdaq indices advanced on Tuesday as investors decided it was too early to fear a pullback, even as bond yields remain depressed.

"We still have time," said Brad McMillan, chief investment officer at Commonwealth Financial Network. The stock rally, he added, "may persist for a while".

Stocks and bond yields have moved in different directions for months, sending conflicting signals to investors alert to alarm signals about slowing global growth. The S & P 500 has jumped 19% since its December lows, while the 10-year Treasury yield has fallen. Investors generally view the decline in bond yields as a sign of economic pessimism, as it reflects increased demand for a safe haven asset.

Investors were forced to take this gap into account last Friday, when the yield on 3-month Treasury bonds exceeded the 10-year Treasury bond rate for the first time since 2007. The curve inversion yield, in which short-term rates rise above long-term rates, preceded each of the last seven recessions, according to the Cleveland Federal Reserve Bank.
Shares plunged 460 points to close the week after the reversal on Friday. But investors have calmed down. They are attentive to the first quarter results and seem to believe that a mass sale would be premature.

Their main reason is that a partial reversal of the yield curve – and it has since shrunk – does not mean that a recession will occur immediately.

When the curve is reversed, the average time to the next recession is 27 months, according to a report by the Bank of America Merrill Lynch Global Research released this week. The range varied between nine and 66 months.

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Analysts generally say that reversal may indicate a recession in about a year. However, it is not acquired and waiting times remain imprecise.

"In addition to" false positives ", a reversal does not help to define the length of the trail between inversion and the recession that ensues, nor the severity of the recession," he said. Liz Ann Sonders, chief investment strategist at Charles Schwab. , said in a note on Monday.

There is also a lingering calm about US economic fundamentals. The US economy has created jobs in the last 101 months. The Conference Board said Tuesday that its consumer confidence index declined in March, but consumers are still waiting for the economy to continue to grow in the near term.

"The reality is that conditions remain favorable," McMillan said.

This could give the stocks space to continue their run. Michael Darda, chief economist and market strategist at MKM Partners, said in a note this week that stock markets generally, but not always, hit their peak after reversing the yield curve.

The additional volatility is not totally excluded.

Peter Boockvar, chief investment officer at Bleakley Advisory Group, said he expects the owl of the Friday bond market weighs on investors.

"The bond market says one thing [and] the stock market says another, "he said. Maybe the bond market is about something we need to pay attention to. "

Business profits in the first three months of the year are largely determinative. They will start posting next month.

Investors appear optimistic about earnings, although more than average companies are turning down their outlooks.

According to FactSet, 73% of the S & P 500 companies that released earnings forecasts downgraded their expected earnings per share.

McMillan said it was not serious – as long as companies end up being under-promising and over-performing.

"There are expectations," he said. "And companies are actively managing their expectations downward."

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