The stock market rally is still alive, but we’re getting warning signs from the bond market. It pays to keep an eye on the bond market, which represents a “collective wisdom” about the future direction of not just bonds but also stocks.

Financial commentators lately are paying particularly close attention to the bond market as a barometer for equities and the economy. (My esteemed colleague Dr. Joe Duarte opines on bonds in his February 3 article.)

A hot topic right now is the possibility this year of an “inverted yield curve,” which occurs when short-term interest rates are higher than long-term interest rates. An inverted yield curve is considered a leading indicator of recession.

Let’s separate the hype from reality, so you can make more informed investing decisions.

Read This Story: The Name Of The Game Is Bond…Treasury Bond

A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds, because of risks associated with time. If they sense a recession is on the way, many investors will start to invest in long-term U.S. Treasury bonds, because they’re pessimistic about the short term. Bond prices and yields move in opposite directions.

A red flag…

The U.S. Treasury yield curve could potentially invert by year-end, strategists at financial services firm Standard Chartered asserted in a recent research note. The warning sent reverberations throughout Wall Street.

A hawkish pivot by the Federal Reserve has boosted short-term rates, flattening the closely followed yield curve on U.S. Treasuries. Analysts typically view this shrinking of the gap between yields on shorter-term Treasuries and those maturing further out as a warning that economic growth is in jeopardy.

Keep in mind, though, that there’s usually a lag time of at least several months between the occurrence of an inverted yield curve and an actual recession. What’s more, we’ve witnessed false alarms in the past.

The benchmark 10-year Treasury note has been rising in recent months and currently hovers at 1.77% (see chart, with data as of February 2):

Higher bond yields raise borrowing costs, hurting economic growth and corporate profitability. Higher yields also make bonds a more attractive alternative to riskier stocks and render lofty equity valuations harder to justify.

This go round, however, the economic expansion is still on track, although there are signs that it’s slowing somewhat. What’s we’re witnessing is inflation pushing up shorter-dated yields.

Read This Story: 3 Dangerous Misconceptions About Bonds

I’d be more worried about a looming recession if other indicators also heralded a slowdown. But growth projections for the global economy and corporate profits remain strong.

Fourth-quarter 2022 earnings reports this week have been solid, with large-cap bellwether companies beating expectations on the top and bottom lines. For Q4 2021, the blended earnings growth rate for the S&P 500 is 24.3%, according to research firm FactSet.

As of February 2, among the 214 companies in the S&P 500 that have reported Q4 earnings to date, 77.1% have reported above analyst expectations.

What’s more, consumer balance sheets, and by extension retail spending, are healthy. Research firm Statista projects that global retail sales will amount to USD26.7 trillion by 2022, up from USD24.8 trillion in 2019.

Accordingly, stocks have been rebounding from a dreary January. On Wednesday, the major U.S. indices posted their fourth straight day of gains, as follows: The Dow Jones Industrial Average +224.13 (+0.63%); the S&P 500 +42.84 (+0.94%); and the tech-heavy NASDAQ +71.55 (+0.50%). The small-cap Russell 2000 fell 21.22 (-1.03%).

In pre-market futures contracts Thursday, U.S. stocks were trading in the red. Asian stocks were generally down, amid concerns over slowing growth (and massive real estate debt) in China.

China recently implemented monetary loosening, to goose along its sputtering economy. For its part, the U.S. central bank just might ease up on tightening this year, if it detects a significant slowdown in the U.S. economy.

Want to mitigate the risks that I’ve just described, but also reap outsized growth? My aforementioned colleague, Dr. Joe Duarte, reveals his number one “profit catalyst” trade for 2022, in a new symposium that’s available for immediate access.

Dr. Duarte is chief investment strategist of Profit Catalyst Alert. His trade is poised to make money, regardless of the path of interest rates or Fed policy. To get the details, click here now.

John Persinos is the editorial director of Investing Daily.

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