Whether the bond market again is foretelling a bear market—a 20 percent drop in stocks from the most recent high—is part of a long-running debate over who does a better job forecasting—stock or bond investors.
Conventional wisdom is that bond investors tend to be more conservative and thus less influenced by fear and greed. That's cited as the reason by some that the bond market does a better job of getting the economy right.
"With all due respect to the stocks guys, the bond guys, when it comes to the economy, tend to sniff things out a little earlier and eventually get things right," says Mike Larson, analyst at Weiss Research. "Bond yield levels have given you key insight into what's going on in the economy. The verdict in my mind is pretty unmistakable."
The concern over what bond market movements portend for the economy come as Wall Street awaits word from the Federal Reserve on what its plans are to juice the economy. The Fed's Open Market Committee meets Tuesday to discuss rates and possible future quantitative easing measures, though some think the central bank has become less an influenceafter three years of aggressive policy moves.
In the meantime, economic signs, particularly in employment and consumer and business sentiment, are progressively weakening, indicating that if deflation is not on the horizon, then strong economic growth is unlikely either.
"At this pace it would take several years to get back to the level of employment we had before the recession," Larson says. "That speaks volumes about what the true underlying condition of the economy is. To me, the stock market is the odd man out."
Indeed, investors seem to be rendering the same verdict, if not in the recent movement of the stock market—where the Standard & Poor's 500has rallied 8.5 percent since July 1—then at least as far as fund flows are concerned.
Equity fund outflows for the most recent reporting week were $688 million, while bond funds saw inflows of $2.1 billion, continuing a trend that has seen the $2.55 trillion taxable bond market average $7.22 billion in inflows per week for the year, according to Lipper data.
Money market funds and their next-to-zero yields also reflected the desire for safety with just shy of $14 billion of inflows for the week, bringing the cash-on-the-sidelines total to $2.82 trillion, according to the Investment Company Institute.
Those eye-popping totals come on top of the nearly $2 trillion in cash that corporations have on the sidelines.
"Why do nonfinancials have a trillion-plus in cash equivalents? There is a reason they do—it's uncertainty out there," says Bob Andres, CIO and wealth strategist for Merion Wealth Partners in Berwyn, Pa. "It's not that they're simply borrowing money at a very low cost and putting money on the shelf. They don't see the opportunity out there. That works against the equity market."