Wednesday's Market Minute: A Closer Look At Turnaround Tuesday

The stock market closed at a new record yesterday, and the session is worth a second look. Of the four major indexes, it was the S&P 500 that posted the biggest gain: 0.84 percent. This alone stands out to some degree because, for the most part lately, the largest moves on any given day have been in either the Nasdaq-100 or the Russell 2000 (more often the former). It’s been rare to see the kind of broad, diverse advance that we saw Tuesday as 10 of 11 sectors climbed. Apple had the first decent showing since its earnings with a 1.5% bounce, but tech as a group was average. Delta variant headlines weighed on some travel and booking stocks, but airlines managed to squeak out a gain, and economically sensitive cyclical groups like energy, banks, and industrials were the best performers.

In other words, the stock market sent a fairly unique signal of economic optimism. Perhaps last week’s infrastructure news is working its way through the system; perhaps the beat on factory orders was a welcome respite from the recent drumbeat of missed economic expectations.

One thing’s for sure: ain’t nothin’ different with bonds. Despite the distinctly positive economic tone in stocks, the 10-year Treasury yield remained glued below 1.2 percent. The relentless pressure on bond yields is nothing new, of course; it’s the great debate in the market right now: is the compressing yield curve a red flag on growth expectations, or merely an assurance that the Fed will never need to hike rates?

I’ve been making the case that the former is a much better explanation and the one that fits with the timing of key bond moves around data and Federal Reserve commentary. But really, you don’t need to be a bond sleuth to interpret the message from falling yields. All you have to do is look at what's happened in stocks during the descent in yields: cyclicals lagging, reopening trades are in bear markets and breadth deterioration.

That’s why Tuesday’s dynamic is unique. All those economically sensitive areas gained, and bond yields stayed the same. If the move in Treasuries this summer is not an economic warning, we should be getting a lot more days like Tuesday. There will be no clearer sign that all is well than if yields stay subdued while stocks do what they did yesterday. If that keeps happening, it'll be hard to deny that the bond market move is innocuous.