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Stocks and Bonds, Parting Ways

January 29, 2011
Stocks and Bonds, Parting Ways

SINCE the financial crisis, bad news for the bond market has generally meant trouble for stocks.

That’s because equity investors have looked to corporate and foreign bonds to gauge the health of the global economy. Last spring, for example, when the debt crisis in Europe erupted — casting doubt on an economic recovery — the Standard & Poor’s 500-stock index sank more than 16 percent.

But in recent weeks, this relationship appears to have broken off.

Stocks have been rallying in the face of declines in bonds, which have been prompted in part by growing concerns surrounding the finances of local and state governments. Since the start of December, municipal, foreign and long-term Treasury bond funds have lost value, on average. And investors have yanked nearly $18 billion from their fixed-income portfolios, according to the Investment Company Institute. Yet, during that same stretch, the S.& P. 500 has risen more than 8 percent.

Why are these markets heading in different directions? It could be a sign that stock investors have grown confident enough in the health of the economy to stop taking their cues from the fixed-income market.

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