The Stock Market Has Fewer Reasons to Rise

Stocks and bonds are telling different stories about the future of the U.S. economy — a contrast that is becoming harder to reconcile as the Federal Reserve gradually removes its support for the recovery.

Last week, the Dow Jones Industrial Average registered five straight days of gains to reach another record high — a trend that would typically reflect an improving outlook for the economy. At the same time, rising prices on longer-term Treasury bonds pushed down their yields — a flattening of the yield curve that suggests disappointing longer-term growth and low inflation.

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Until recently, the unusual tendency of stock and bond prices to move together has had a sensible explanation: Bond investors expected the Fed to maintain its extraordinary monetary stimulus far into the future, a situation that would keep borrowing costs low and support the stock market.

Now, however, the Fed's support is gradually waning, as evidenced by greater disagreement on monetary policy, the imminent end of the central bank's bond-buying program and the increasing dependence of stimulus on economic developments.

With the Fed leaving the scene, the ability of stocks to keep rising in a lackluster economic environment will depend more and more on private money, be it the idle cash of people and companies or borrowed funds that ultimately draw on the huge excess reserves held by banks at the Fed.

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Both the corporate sector and retail investors have been rather slow to loosen their purse strings after the shock of the global financial crisis, so there are still plenty of resources that can be deployed. Consider, for example, the huge demand for the initial public offering of Chinese e-commerce company Alibaba.

Still, the reasons for stocks and bonds to rise together are no longer as broad-based as they used to be. The trend's survival will rely on the market's ability to keep attracting private money from the sidelines, and do so at ever-higher prices.