I’ve often highlighted the fact that equity traders view the world differently than bond traders. Actually, I’ve argued that the latter group tends to be much savvier than the former when it comes to understanding complex economic and financial issues.

Maybe it’s the fact that it takes a certain kind of intellect to understand the notion that when interest rates go up, the prices of fixed-income securities tend to fall — and vice versa. I don’t know.

Regardless, events of the past year have repeatedly confirmed the fact that those who focus on buying and selling stocks have had a hard time coming to grips with what is going on around them, especially when the closest parallels are the upheavals that took place nearly eight decades ago.

In “Stocks Give Muddled View of Crisis,” the Wall Street Journal’s Justin Lahart looks at the disconnect between the two markets.

While Dow Gained on Hopes for Deal, Libor Showed Stress

For generations, the way to answer the question “How’d the market do today?” was easy: Just say what the Dow Jones Industrial Average did. But not now.

Now, the stock market often seems out of sync with the credit crisis embroiling the financial system. Thursday was a case in point. The Dow Jones Industrial Average shot higher when the stock market opened on hopes that the bailout plan getting hashed out in Congress would offer a salve to the financial system. But the short-term credit markets that lie at the center of the crisis were telling a different story. Libor, a widely followed benchmark interest rate for many dollar loans between banks that is set each morning in London, jumped by its most since 1999, rising to 3.77% from 3.48. A similar measure set in the morning in New York, NYFR, also registered a sharp gain.

Jumps in Libor and NYFR are a sign that banks are becoming increasingly wary of doing business with one another. Thursday’s move could have been a sign that credit-market participants didn’t think Washington was moving ahead fast enough with its bailout plan, thought it is moving in the wrong direction, or that a major player is in deep trouble, said Michael Darda, chief economist at MKM Partners.

“It’s very disconcerting,” he said. “There have been several occasions when the credit market and the equity market diverged over the past year and in virtually every case it was the stock market that was wrong.”

In mid-July, for example, the stock market began a monthlong move higher. But the difference between Libor and three-month overnight index swaps, which represent what the market thinks the Federal Reserve’s overnight lending rate will average over the next three months, shifted higher, reflecting rising concern in the credit markets. Thursday, the difference between the two reached two percentage points, up from 0.8 point at the start of the month.

“We still have massively dysfunctional credit markets,” said Douglas Cliggott, chief investment officer at Dover Management. “Debt is still the oxygen of this economy, so if we can’t find a way to get the credit engine going, we’re going to have a pretty nasty recession.”

Stocks have never been a perfect window into the health of the financial system. But during other crises they were a better reflection of what was happening because they were closer to the action. In the 1987 crash, problems with quick-fire stock-trading strategies played a major role. The 1998 financial crisis began as a debt problem, but because Long Term Capital Management — the hedge fund at the center of the storm — was forced to sell large stock positions, stocks soon reflected the magnitude of the crisis. The 2000 bust was a stock-centered phenomenon that came with the bursting of the dot-com bubble.

The role of stocks in the current crisis is less direct. Investors are attempting the difficult calculus of gauging how credit problems will affect the economy, and thereby profits. Measures of financial stress are often opaque and information is scant — making for an uncertain environment where a lot of stock market activity has come down to “me wondering what you’re wondering about what I’m wondering,” said William Sterling, chief investment officer at Trilogy Global Advisors.

In addition to the uncertain environment, many financial firms have become so stressed that their shares are now little more than all-or-nothing bets on whether they will be able to survive. That makes them incredibly volatile, giving confusing signals to investors who watch them to gauge what is happening in the financial system.

Many investors watch Libor to gauge market stress. Typically, it is compared with other rates that it would normally trade in line with, such as overnight index swaps and the yield on the three-month Treasury bill. Other measures include rates on short-term IOUs issued by banks and companies known as “commercial paper,” the Markit CDX index, which moves based on the cost of insuring against the default of 125 investment-grade companies and the fed-funds rate.

But the measure to watch can be a moving target. For some time, credit analysts were glued to the ABX, an index of credit-default swaps tied to different subprime mortgage-backed securities, which began signaling the extent of the subprime problem in late 2006. But the index has now fallen by so much, and has become so volatile, that its value as a predictor has fallen.