For a while now, I have felt clueless about the behavior of the long bond. (Not that I am a whiz about stocks.) In the past couple of months, its yield moved in the same direction as stock indices, even though I grew up learning that they were supposed to move in opposite directions. My guess at the time was that there was no money flowing into the markets, so that it was a zero sum game. A fund has to sell bonds to raise cash to buy stocks, so both stocks and yield go up, and vice versa. (The alleged repatriation of Japanese money and the real recovery of emerging markets probably had a hand in this as well.)
The correlation has been less abnormal this month. But I am still at a loss as to how cyclical stocks have put on such a fast and furious rally when all the other indicators showed little concern over inflation. Yesterday was a good example: cyclical stocks continued to rally when long bond yield dropped 6 basis points on a benign employment cost index report. Today is just the opposite: bond yield has spiked incredibly, yet cyclicals are underperforming and the Dow Utilities Index has barely budged.
As a result, I have decided to ignore interest rates in my stock analysis, and use the Utilities Index as my primary inflation indicator. When I focus on the stock market and its internals, I cannot help but be very bullish (at least in the short term), so much so that I am moving my 401(k) into equity today. (Oh no, another dipster!)
I know I may not want to find out, but I have to ask: am I crazy? |
