ALL BUSINESS: When Economy Views Collide

Those owning equities have become more upbeat that monetary and fiscal measures will ease the nation's economic woes fairly fast. Debt holders, meanwhile, are betting the economy is doomed to fall into a recession, as evidenced by the significantly widening of spreads between corporate bonds and Treasury notes.

Stockholders often don't come out ahead when those views collide. History shows that when investors demand ever-higher yields for middle-grade corporate debt with a rating of Baa than they will accept for risk-free Treasuries, it usually signals bad news for stocks four to six months later, according to Merrill Lynch. Its researchers estimate that every 100 basis point gap in those spreads eventually translates into a 300-point decline for the Standard & Poor's 500 stock index.

Based on how far those spreads have widened since last fall, Merrill Lynch said the S&P 500 could be trading around 1,200 by March. That would be about 12 percent below current levels and 23 percent below the record high for the index reached on Oct. 9.

That helps to back the argument of Wall Street's pessimists who think modest stock gains seen since Jan. 22 are nothing more than a bear-market rally, with investors just catching their breath before more aggressive selling begins.

Two aggressive interest-rate cuts by the Federal Reserve have helped temper stock owners' concerns in recent weeks. Those actions a surprise move on Jan. 22 and another one at the central bank's regularly scheduled meeting on Jan. 29 knocked down its federal funds rate by 1.25 percentage points to 3 percent.

On Wednesday, Fed Chairman Ben Bernanke signaled that there would likely be more cuts in the overnight lending rate for banks to steady the teetering economy. "The economic situation has become distinctly less favorable" since the summer, the Fed chief told the House Financial Services Committee.

The government's $168 billion economic stimulus package, which promises tax rebates to individuals and businesses later this year, also has fed stock investors' optimism.

The S&P 500 jumped more than 4 percent in the last five weeks before a pullback on Thursday. Other major market indices are also higher since then the Dow Jones industrial average has climbed more than 5 percent, while the Nasdaq composite index has gained more than 2 percent.

What's interesting is how investors have started overlooking news that weeks ago could have sparked a major sell-off. For instance, data issued on Tuesday showing continued deterioration in housing prices and a surge in foreclosure filings didn't roil the markets, and stocks that have been hard hit by such news in the past staged strong rallies.