NEW YORK (TheStreet) -- The rally in both bond and equity markets is causing debate among money managers over which type of fund will ultimately do better.
SPDR S&P 500 (SPY) reached record levels last week after closing above 192 on Friday. The index had been in a consolidation pattern since March, but broke higher after optimism of stronger second-quarter economic growth pushed investors back into equities.
Meanwhile, iShares Barclays 20+ Year Treasury Bond (TLT) continues to make yearly highs, pushing rates to their lowest levels in 11 months. Coming into the year, investors thought that reining in monetary stimulus would lead to a bear market in Treasury bonds. So far, those investors have been wrong, and short-covering has ensued.
Both equity and bond investors have gripped tightly to their investment thesis in 2014, and bid each market higher.
This week, however, will be a telling moment for which camp is trading in the right direction.
The European Central Bank, which will meet on Thursday, is expected to offer some form of stimulus package to reignite the region's falling inflation.
At the last policy meeting in May, ECB President Mario Draghi said that the central bank was "comfortable acting in June" if updated economic forecasts merited that. The press conference raised market expectations that the ECB would act boldly, and with the recent monthly inflation reading showing a 0.7% acceleration in May, action may be needed.
On Friday, the ever-important U.S. nonfarm payrolls figure will show whether the labor market is continuing to heal or falling back into stagnation.
Economists are looking for 247,000 jobs added to the labor force, which if met, would mean the four-month moving average of the indicator was above the 200,000 jobs mark.
As economic growth and wages have remained weak throughout the first quarter of the year, a stronger labor market would be just what the economy needs to increase the speed of the recovery.
Inflation estimates should move higher if the payrolls report outperforms expectations, which would lead investors to sell Treasury bonds. Equities would likely rally higher on positive economic news.
Alternatively, news out of the eurozone that signals increased stimulus could push up inflation readings and force funds out of Treasury bonds. That, too, could lead to a bid higher in global equities as the ECB would be signaling they were committed to growth in the region.
With the economic data and ECB's actions this week, bond and equity investors will know more about the future direction of their markets.
An investor or trader can either make his bets ahead of time or wait for the week to play out and go on from there.
SPY data by YCharts
At the time of publication, the author had no position in any of the funds mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.