Look to Stock-Bond Correlation to Understand the Recent Rally

by: Eddy Elfenbein

Eddy Elfenbein submits: I wanted to follow-up on my previous post about how stocks and bonds have become correlated.

This is a very important point, and I think it explains much of the recent rally. Here's at look at how they've performed since April 25. For my bond proxy, I'm using the American Century Target Maturity 2025 Fund [BTTRX].

The two asset categories were negatively correlated until the middle of June. Since then, stocks and bonds have moved in tandem.

A scatter plot will show it better. Here's the S&P 500 and the BTTRX from April 25 to June 15:

A downward sloping lines mean a negative correlation. The worse bonds did, the better stocks did. This tells us that money went directly out of one asset and into the other. But then, the markets suddenly converged in mid-June. Here's a scatterplot from June 16 to yesterday:

Except for a few strays, that's a pretty strong positive correlation. This tells us that money was coming out of hard assets like gold and into paper assets.

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