Stocks and Bonds Part Ways

Bloomberg reports:

For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.

The 30-day correlation coefficient measuring how often the Standard & Poor’s 500 Index moves in tandem with 10-year Treasury yields fell to minus 0.42 from a record 0.89 in June, data compiled by Bloomberg show. Readings of 1 indicate prices are moving together, while zero shows no link and minus 1 means they are going in opposite directions. Stocks and debt are ending a lockstep relationship that began in July 2007 and lasted through the worst recession since the 1930s.

This is exactly what I said would happen with QE2. The Federal Reserve wants investors to leave secure assets like bonds and turn to riskier assets like stocks.

Here’s a look at the S&P 500 (in black) compared with an ETF of long-term Treasuries (in gold):

It’s almost like a mirror image. In fact, I’m not quite sure what Bloomberg is referring to as a “period of positive correlation” during June. But let’s leave that aside for now because what we’re also seeing is that within stocks, investors are moving to riskier classes.

Check out the difference between the small-cap Russell 2000 (gold) and the S&P 500 (black) over the last three months.

Posted by on November 22nd, 2010 at 10:24 am


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