On Tuesday, the stock market sold off as it finally followed the recent trend in the 10-year bond and dollar. I have mentioned in a previous article that the 10-year bond yield decline is a sign inflation expectations and GDP growth estimates have diminished. Some may have postulated the 10-year yield falling was a minor correction because it increased too much, too quickly into the Fed’s rate hike. These investors are now questioning their initial analysis and considering if my point about growth has any merit. The 10-year bond yield has fallen about 19 basis points from when it reached above Bill Gross’ 2.60% target last week. That sharp rally in bonds goes against the concept that the Fed is raising rates to prevent inflation from getting too high.

The dollar is singing the same tune as the 10-year bond. After closing at $102.20 early in March, the dollar index has been on a one-way trip lower to below the critical $100 level. The Fed raising rates is supposed to be bullish for the dollar. Instead the dollar sold off just as the chances of a Fed rate hike in March started to increase. This doesn’t confirm the supposed strength the Fed sees in the economy. The dollar index has ignored the Fed and followed GDP expectations lower. Another recent reason for the dollar’s selloff today is the French presidential election. There was presidential debate yesterday where the centrist Macron did well which is bullish for the euro. In a snap poll of who was the most convincing Macron received 29% and the right-wing Le Pen received 19%.

When you look at the stock market from this perspective, it’s amazing the market hasn’t fallen sooner. The Fed is the only one of these four indicators who is bullish on the economy and the Fed raising rates is bearish for stocks. Supporting my point that’s it’s amazing stocks have rallied so much is the latest fund managers survey from Bank of America Merrill Lynch. As you can see in the chart below, there is a record amount of fund managers who say the U.S. stock market is overvalued. 81% of fund managers think the U.S. is the most overvalued region in the world. Usually investor polls match the market’s recent performance because if investors are acting in the same way as they state in the polls, they move the market in that direction, but fund managers polls tend to act as counter indicator since it’s the ‘smart money.’ However, it’s unusual to see such a large difference in market performance and polls for this length of time. For most of the past three years, fund managers have thought stocks are overvalued. As a bear who does objective analysis, I expect to be wrong as the market rallies on irrational hope.