Bonds signal recession. Stocks have been buoyant. What gives?

WAR! FAMINE!AIDSSP Death! ! This is how Bill Hicks, a revered comedian who died in 1994, aged 32, riffed on the disorienting effect of watching cable news. Homelessness! Recession! Depression! The shocking headlines come at you relentlessly. But look out of the window and everything seems calm. The only sound is the chirping of crickets. You start to wonder, said Hicks: where is all this bad stuff happening?A lot of bad stuff is happening just now, most notably a war in Europe. There is also inflation and growing fears of recession. Government bonds have just had their worst quarter for returns in ages. The Treasury yield-curve has inverted: the gap between yields on ten- and two-year bonds recently turned negative, an early warning of a downturn. The Federal Reserve is growing more hawkish. Yet stocks are surprisingly buoyant. Even after a few days fairly deep in red ink this week, the & 500 index of stocks is only 7% below its all-time high. This might look like a foolish stockmarket failing to take its cue from a more realistic bond market. But the truth is more complicated.