Wall Street Is Baffled by the Stock Market

The bond market finally got the Federal Reserve’s message on rates, while stock investors continue to ignore it, for the most part.

While the mood music soured in the latter half of the week, equities are still largely defying the one thing that has repeatedly proved kryptonite in past rallies: Surging interest rates.

With a slew of Fed officials threatening to ramp up rate hikes after still-hot economic data, Treasury yields broke out anew and traders raised their expectations for how high the benchmark rate will go. Yet the S&P 500 finished the week lower by just 0.3%, and the Nasdaq 100 eked out a 0.4% gain as still-loose financial conditions bely the most-aggressive policy tightening campaign in a generation.

The brutal repricing in the two-year Treasury note would imply a 5% to 10% slump in the Nasdaq 100 and more for volatile tech equities, if past market moves are anything to go by, according to JPMorgan Chase & Co.’s Marko Kolanovic.

However, still-resilient equities have diverged from fresh bond losses, a potentially unsustainable development.

That could mean bad news for hedge-fund managers who have snapped up tech shares over the past two weeks, and bodes ill for balanced-portfolio strategies that are still reeling from last year’s bond-stock crash.