Continuing last week's theme, stocks posted strong gains Monday while bonds were unable to rally despite more sluggish economic data. As of 1:45 p.m. EDT, the Dow Jones Industrial Average was up 2% to 8,955.76, the S&P 500 was up 2% to 947.34 and the Nasdaq Composite was up 2.5% to 1,394.54. Stocks were getting a lift from better-than-expected quarterly results at Lowe's ( LOW) and Toys R Us ( TOY), as well as rallies in recently battered names such as Qwest ( Q), Vivendi ( V) Dynegy ( DYN) and Tyco ( TYC). The rally came despite a 14% decline in shares of AstraZeneca ( AZN) following disappointing trial results for its experimental cancer drug, Iressa. OSI Pharmaceuticals ( OSIP), which currently has a similarly structured drug, Tarceva, in trial, was down 49.3%. The Amex Biotech Index was lately down 1.8%. On the macro front, the Conference Board reported a 0.4% drop in its Index of Leading Economic Indicators for July, the largest drop since September 2001, while June's LEI was revised downward to a drop of 0.2% from flat previously. "While not pointing decisively toward renewed recession, the recent behavior of the index is consistent with our forecast for a continuation of rather subdued, slightly below-trend economic growth over the next six to nine months," said Peter Kretzmer, senior economist at Banc of America Securities. "The degree of softness will determine whether or not the Federal Reserve eases," he added, although most economists -- and the fed-fund futures contract -- suggest they will ease on or before the next scheduled policy meeting on Sept. 24. Despite the latest news of economic weakness, the price of the benchmark 10-year Treasury was unchanged at 100 13/32, its yield at 4.32%. The action came on light volume typically associated with a mid-August Monday, but also amid an ongoing debate over whether Treasuries peaked last week, as discussed here Friday.
How Safe Is Your Haven, Part 2
"When investors sense a real bottom in stock prices we could probably call the bottom in Treasury yields," Richard Berner, U.S. economist at Morgan Stanley, commented Friday. "In either case, we won't know it's the bottom until after the fact." Berner was pretty noncommittal on the subject, suggesting "intuition says that Treasuries are expensive" but admitted "intuition has failed miserably this year" -- at least for some. Furthermore, "if yields stand at these bargain-basement levels today, where would they be in a double-dip deflationary scenario?" he wondered. Over on RealMoneyPro.com, Brian Reynolds suggested "Treasury prices are still in the long uptrend that started in May, even after the selloff of last week." However, the "most important thing" is the health of corporate bonds, Reynolds added, noting that the narrowing of spreads between yields on corporate and Treasury bonds that began last week is continuing today. The fate of the corporate bond market has been on the minds of many bond market participants -- and policymakers -- of late. Earlier this month Pimco's Bill Gross described the corporate bond market as "half frozen" and alluded to the type of credit crunch that can make central bankers seem impotent and cripple the economy. Last Wednesday, the Standard & Poor's Speculative Grade Credit Index reached record levels, higher even than in the aftermath of the Sept. 11 attacks. The index is designed to mirror the high-yield bond market and measure the trend in spreads between high-yield corporate bonds and Treasuries. High-yield bonds are the proverbial canary in the financial market's mineshaft, as one longtime reader quipped. Thus, the recent record levels for the Speculative Grade Index was a cautionary note to many observers, a signal that the recent rally in equities was yet another false dawn. (Separately, RealMoney.com contributor Ben Warwick reported May through July was the worst three-month period on record for the high-yield debt market.) However, S&P's index rallied smartly at the end of last week, in concert with equities. A recovery in high-yield bonds would be a sign investors' steep aversion to risk is abating, something recent gains in semiconductor and telecom stocks also indicate. The Philadelphia Stock Exchange Semiconductor Index was lately up 4.6% while the Nasdaq Telecom Index was up 2.9%. Regardless of its prudence, a revival of speculation is potentially bad for safe-haven fixed-income investments such as Treasuries and municipal bonds. That's something to keep close watch on in this otherwise "sleepy" period, and a subject we plan to examine this week.