[ Stocks and Bonds ]
You know what's interesting, is overlaying a plot of the 30-year Treasuries over the S&P 500 index. (By inverting the yield chart, I established a proxy for the price trend: if bond prices go up, yields go down, which is good for stocks. With an inverted chart of the yield compared to the S&P 500, I can see a one-to-one relationship between the prices of both stocks and bonds).
The overwhelming observation is this: bond prices seem to affect the market's "ease of movement." When moving in lockstep with the market, it can act as a tailwind, propping prices as they move higher (1995 to 1996). Or when bond prices go down, it can act as a headwind, pressing against the broad market price trend, causing a choppy trading period (October 1994-October 1995), or a downright decline (January 1994).
It appears to have the tendency to lead the market, and is effective as a Divergence measure. The trend in stock and bond prices in 1987 is a very good example of this phenomenon. 1990 is another example, where stock prices hit new highs, but were unconfirmed by similar highs in the bond markets. With stocks following bonds, that was not a good signal for investors.
A curiosity in recent times is the divergence of stock and bond prices: as the sky was falling, prices of bonds appeared to become artificially inflated in a "flight to quality" buying binge, while stocks were plummeting to lows that eliminated the year's heady gains.
As stabilization has come within viewing distance, the correction of this anomaly resulted in a snap-back to equilibrium: stocks reverted to their prior relationship with the bond price-trend by running contrary to the historical relationship between the two--this time stocks sustained an upward move, while bond prices continued to fall.
Since October 6th, the bond price trend has been down, while the stock price trend has been up. What remains to be seen is how the markets will behave looking forward. How much longer can this snap-back/divergence continue before history once again takes the reins and causes stock prices to move in lockstep with bond prices? If it does so anytime soon, and if the trend in bond prices continues as it has for the near future, it may be time to look for an easing in stock prices.
RT |
