Stocks vs. Bonds -- Who Will Win This Tug-of-War?

Includes: IEF, SPY
by: SA Eli Hoffmann

Excerpt from our One-Page WSJ Summary:

AHEAD OF THE TAPE: Heads or Tails

Summary: With both stocks and bonds making new highs, the markets are giving traders mixed messages. Stock traders seem to believe the economy is strong enough to promote continued growth, and that interest-rate increases are over as inflation has ceased to be a concern. In 1995 the Fed stopped raising short-term rates, and the Dow rose 33%. Bond traders have pushed yields on 10-yr Treasury notes down to about 4.5%, well below yields on shorter-term securities. Known as yield-curve inversion, it indicates investors foresee economic weakness in the future, which would lead the Fed to drop interest rates to revive it. (In '95 long-term yields were well above short-term yields; the bond traders and the stock traders were on the same side of the fence.) Some traders feel the bond guys have it wrong; they're obsessed with the struggling housing market (less borrowing) and ignoring the broader picture.
Related links: Full WSJ articleWaltz of the Stocks and BondsStock Earnings Yields vs. Bond Yields 1/85-8/06This Rally's Got LegsDon't Bet on the Markets Until They Outpace T-billsAvoid the 10-year Treasury like the plagueWill Bond Yields Continue Falling? • A weak housing market may indeed have broader implications
Potentially impacted stocks and ETFs: iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY) • iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF) • iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT) • S&P 500 Index (NYSEARCA:SPY) • NASDAQ 100 Trust Shares ETF (QQQQ) • iShares Russell 2000 Index ETF (NYSEARCA:IWM)

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