Stocks fall in line with bond market’s dim view of economy

After a lengthy disconnect, the U.S. stock market may now be back on the same page as the bond market, which for the past month and a half has been signaling a gloomier view on the economy.

“The bond market is telling you the economy is not good,” said Bill Webb, deputy chief investment officer of Gluskin Sheff, a Toronto-based independent investment.

And “the equity market was oblivious,” Webb said of the U.S. stock market’s double-digit climb off its March lows.

Webb notes the divergence between stocks and bonds over the past month and a half.

Typically, bond market yields, which move in the opposite direction as prices, move in lockstep with the equities market.

In more recent weeks, stock and Treasury prices have risen in unison.

The more than 15 percent climb in equities, year-to-date, comes in large part due to short covering moves by portfolio managers and other professionals, “like myself,” said Webb.

For instance, the financial sector became more alluring in mid-to-late March, Webb said.

“When we knew the government wasn’t going to let banks go under, we put some cash to work. Some of the best performing stocks year-to-date were those where the risk of bankruptcy was the highest,” he said.

But the typical investor is mostly concerned these days with preserving capital, making the U.S. equities market a far riskier proposition.

“The average investor gets it and is scared,” Webb said.

On Friday, disappointment over September’s jobs report, which has the unemployment rate climbing to 9.8 percent, helped fuel a second day of losses. Read Economic Report.

As is often the case, the initial market response to Friday’s jobs report was overblown, and in reality the data do not change the fact that “employment conditions are negative but improving,” said Hugh Johnson, chairman of Johnson Illington Advisors.

“That was true in August and it’s still true now,” Johnson said.

However, “there are reasons to believe the stock market should correct, and that’s because we’ve come so very far so very fast,” Johnson said.

“My view is that the easy money has been made, between March and now, and it’s now tougher because we’re looking at higher inflation and higher interest rates. Worries about both will intensify and are well founded,” Johnson said.

Consumer discretionary shares weighed the most and consumer staples fronted limited gains as the major indexes tallied a second week in a row of losses. The Dow Jones Industrial Average fell 21.61 points, or 0.2 percent, to 9,487.67, leaving the blue chips down 1.8 percent for the week. The S&P 500 Index shed 4.64 points, or 0.5 percent, to 1,025.21, a level that translates into a 1.8 percent decline from the week-ago close. And the Nasdaq Composite Index dropped 9.37 points, or 0.5 percent, to 2,048.11, leaving the tech-laden index with a 2.1 percent drop for the week.

On Thursday, the Dow industrials dropped 203 points, tallying its largest single-day fall since early July.

(c) 2009, Inc. Source: McClatchy-Tribune Information Services.