Investors' Capitulation and Bond Jump May Delay Stock Market Bottom

The recent stock market pullback accompanied by a rout in the Treasury market has left investors increasingly pessimistic about equities. However, extreme pessimism can be a contrarian indicator, often preceding strong stock-market gains. The outlook is complicated by the Treasury market rout, with investors even more pessimistic toward fixed income. Rising yields have historically signaled the need for the Federal Reserve to fight inflation, but in recent years, rising long-term yields were seen as bullish for stocks. Analysts suggest two likely scenarios: a risk-off environment where Treasury bonds rally while stocks continue to correct, leading to a year-end stock market rally, or both stocks and bonds rallying together, with bonds outperforming. The market will ultimately determine the outcome.