Stock-Bond Divergence Mystery Eases, Signaling Belief in Growth

An enduring mystery of 2021 markets showed signs of unwinding Thursday, with divergent signals on economic growth in stocks and bonds beginning to harmonize.

The S&P 500 climbed 1.2%, ending the longest drought of big up days in 20 months. Economically sensitive shares like energy and banks led the advance. Meanwhile, 10-year Treasury yields jumped the most since February to a two-month high.

While it’s just one day, the concerted moves were something new after many months when 10-year yields clung to the floor -- a sign of economic dread -- while the S&P 500 marched to record after record.

While it may seem strange that Jerome Powell’s strongest pledge yet to start lifting stimulus would be the occasion for such an alignment, it could make sense in a context where investors’ biggest concern is a resurgent coronavirus. The Federal Reserve chair’s taper talk featured heavy doses of economic optimism with a view that growth next year may be strong enough to warrant higher rates.

“You got a very nice layer of reassurance coming from Powell -- we’re on track,” Mike Bailey, director of research at FBB Capital Partners, said by phone. “The risk-on community got stressed out and overheated on Monday, but now we are seeing the temperature come down for that part of the market.”