The stock market's split personality

The smartest insight and analysis, from all perspectives, rounded up from around the web:

Something very, very weird is happening in the global markets, said Mark DeCambre at Market​Watch. "Investors typically don't buy bonds and stocks at the same time," but right now they're doing both in droves. The S&P 500 and Dow Jones indices hit record highs this week, buoyed by the U.S. economy adding an impressive 287,000 new jobs in June. But even as investors rushed to bet on stocks, they were also pouring money into the safety of bonds. As a result, the yield on the 10-year U.S. Treasury note sank to an all-time low of 1.37 percent. Usually, falling bond yields are a sign of major economic trouble ahead, signaling that anxious investors are looking for a safe haven to stash their cash. But then again, markets just hit "dizzying heights," which tends to be great news. "What gives?"

Savvy economists have long looked past the erratic stock market to the steadier bond market for real clues about the economy, said Neil Irwin at The New York Times. "And right now, if the bond market is correctly predicting the economic path ahead, we should all be terrified." Based on historical patterns, the U.S. bond market is telling us that there's a 60 percent chance of a recession in the next year. Internationally, the signals are even more ominous. A third of developed-country government debt — a total of $7 trillion, from countries like Germany, Japan, Switzerland, and Denmark — now trades at negative interest rates, meaning buyers are guaranteed to get less money back than they put in. This is "a development without precedent in hundreds of years of financial history." Investors appear to be so worried about stagnation and a global recession, said Paul Lim at Time​, "that their primary focus is on the safe return of their capital — that is, making sure they can simply get it back — not earning big returns on their capital."

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"Market lore would suggest that bonds and stocks really shouldn't rally at the same time. But like most lore, there's a fair bit of hooey in it," said Matt Phillips at Quartz. Stocks and bonds have rallied together in the past whenever the market expected central bank stimulus, which boosts all asset classes at once. "Lo and behold," the Bank of England says it may embark on a new round of quantitative easing to prop up the U.K. economy in the wake of the Brexit vote. The Bank of Japan is planning similar moves. Here in the U.S., the Federal Reserve has temporarily halted its program of rate increases in the face of economic uncertainty. "In other words, both the stock market and the bond market can actually be right."

But it's not just the bond market that should be causing us to worry, said Anthony Mirhaydari at The Fiscal Times. Corporate earnings have been declining for the past four quarters. "Global stocks are being routed." Factor in the aforementioned collapse in government bond yields, the economic fallout from the Brexit vote, and the Federal Reserve's dithering on interest rates, and the stock market looks like it's "heading for a Wile E. Coyote Moment." If the bond market is to be believed, we've just hit that moment when the coyote has already run off the cliff and is floating in midair. "But eventually, he looks down. And gravity ends the fantasy."