Stocks and Bonds Become Friends

Here’s an interesting change that’s happened recently in the market. Stocks and bonds used to move in opposite directions. Here’s a look at the S&P 500 ETF ($SPY) along with the Long-Term Treasury ETF ($TLT). This chart covers April 12th to May 21st:

But after May 21st, things suddenly changed as stocks and bonds moved together.

The correlation coefficient went from -0.90 to +0.85. To be fair, this relationship is no stranger to big swings but I’m not aware of one so dramatic in such a short period in several years.

I cut Friday off the chart because that was a reversion to the negative correlation — stocks did well and bonds did not. Today seems to be more of that.

So what does this mean? It’s hard to say exactly, but my guess is that financial markets went from arguing one point — strong economy, yes or no; to hashing out another point — are we having a financial crisis, yes or no.

Now, apparently, we’re back to discussing the strength of the economy, and the bulls are winning (for the moment).

Posted by Eddy Elfenbein on July 8th, 2013 at 3:25 pm

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