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Bond market flashed recession. So why is the stock market flourishing?



S & P 500, Dow and Nasdaq rose Tuesday when investors decided it was too early to worry about withdrawing – even though bond yields are still depressed.

"We still have some running time," said Brad McMillan, Chief Investment Officer of the Commonwealth Financial Network. The shares collect, he added, "can last a while."

Stocks and bond yields have moved in different directions for several months, sending conflicting signals to investors looking for warning signs to slow global growth. S & P 500 has jumped 19% since the decline in December, while the return on the benchmark 10-year government bond has declined. Investors usually see falling bond yields as a sign of economic pessimism, as it points to increased demand for a haven.

Investors were forced to reckon with that divergence on Friday, as the yield on three-month government bonds rose above the rate of 1
0-year Treasuries for the first time since 2007. The so-called yield curve inversion, where short-term prices exceed long-term prices, has been ahead each of the last seven setbacks, according to the Federal Reserve Bank of Cleveland.
Stocks threw 460 points to close the week after the inversion on Friday. But the investors calmed down. They have an eye on first quarter earnings, and seem to believe that a sale would be too early.

Their primary reason is that a partial yield curve inversion – and it has since narrowed – does not mean that a recession will strike immediately.

When the curve alternates, the average period to the next decline is 27 months, according to a report by the Bank of America Merrill Lynch Global Research this week. The area has varied between nine and 66 months.

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