Equity market participants, particularly retail investors, have been adding risk to their portfolios by buying the dip on high-beta and long-duration stocks, but bond investors are doing the opposite. This is shown by the SPX Volatility Index retreating to its start-of-the-year levels while the U.S. Bond Volatility Index has skyrocketed above where it was during the COVID-19 meltdown in March 2020.
The decision of whether to listen to institutional bond participants managing risk or retail stock investors chasing it is a rather easy one. This is exactly where the difference of outlook comes in, because retail participants are betting central bankers will not raise rates as fast or as high as bond markets are factoring in. Instead, they’re choosing to believe inflation will eventually prove temporary and the risks of a recession are too great for central banks to be in tapering mode.