Generally, bond and stock prices move in the opposite directions. But when do they move in the same direction? That's the case for yesterday and today. Is that just a coincidence?
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bond and stock move in the same direction?
- Thread starter CoolTrader
- Start date
Over the long-term, bond and stock prices will trend in the same direction. To see this relationship, though, you will need to look at charts dating back to at least the 1970's.
The basis for this relationship is probably manyfold. Two important reasons might be: (1) alternative investment returns; and (2) value of future cashflows. Regardless, PE compression occurs in a rising interest rate environment; likewise, PE expansion occurs when interest rates decline.
The most recent, and maybe best, historical example is the bull market that ran from 1982 to early 2000. Although company earnings rose during that time, the greater contribution to equity price increases was from PE expansion. It is probably not coincidental that during that time interest rates dropped significantly.
Certainly, there are extended periods of time when stock and bond prices move in opposite directions. Most notably, in 1929 and 1999, stock prices rose while bond prices were declining. Thus, it appears the basic economic relationship between stocks and bonds is "divorced" during ... ummmmm ... less rational times.
The basis for this relationship is probably manyfold. Two important reasons might be: (1) alternative investment returns; and (2) value of future cashflows. Regardless, PE compression occurs in a rising interest rate environment; likewise, PE expansion occurs when interest rates decline.
The most recent, and maybe best, historical example is the bull market that ran from 1982 to early 2000. Although company earnings rose during that time, the greater contribution to equity price increases was from PE expansion. It is probably not coincidental that during that time interest rates dropped significantly.
Certainly, there are extended periods of time when stock and bond prices move in opposite directions. Most notably, in 1929 and 1999, stock prices rose while bond prices were declining. Thus, it appears the basic economic relationship between stocks and bonds is "divorced" during ... ummmmm ... less rational times.
in reality, it's the public Joe Six Pack Investor that gets suckered but the brokerage industry into believing that even though interest rates are rising, you need to have 30% bonds etc. .. what bullshit.
brokerages have big bond houses that need to be fed and what better victims are there than grandma and her $300,000 IRA account.
just my opinion, but the great 21st century credit bust is just now growing baby teeth.
just an opinion of course.
brokerages have big bond houses that need to be fed and what better victims are there than grandma and her $300,000 IRA account.
just my opinion, but the great 21st century credit bust is just now growing baby teeth.
just an opinion of course.
OK, here is the basic cycle.
1a) Stocks are climbing and the economy is over heating.
1b) Bonds fall as inflation and the Fed move rates up. (opposite)
2a) Stocks fall as investors see rates will soon be too high to sustain growth.
2b) Bonds continue to fall as data must show a slower economy and lower inflation before Fed eases. (same)
3a) Stocks continue to fall as the economy goes in the tank to reel in inflation.
3b) Bonds start to climb as inflation drops and the Fed starts to ease. (opposite)
4a) Stocks start to climb as investors see lower rates leadiing to new economic growth.
4b) Bonds continue to climb until economic data shows too fast of economic growth and inflation starts to become a problem. (same)
5) Go back to #1 above.
Currently, we are near the end of #4 and about to enter #1.
1a) Stocks are climbing and the economy is over heating.
1b) Bonds fall as inflation and the Fed move rates up. (opposite)
2a) Stocks fall as investors see rates will soon be too high to sustain growth.
2b) Bonds continue to fall as data must show a slower economy and lower inflation before Fed eases. (same)
3a) Stocks continue to fall as the economy goes in the tank to reel in inflation.
3b) Bonds start to climb as inflation drops and the Fed starts to ease. (opposite)
4a) Stocks start to climb as investors see lower rates leadiing to new economic growth.
4b) Bonds continue to climb until economic data shows too fast of economic growth and inflation starts to become a problem. (same)
5) Go back to #1 above.
Currently, we are near the end of #4 and about to enter #1.
Money market. Actually, the USD should be climbing as U.S. rates increase. We usually lead the world economic recovery.
Quote from MR.NBBO:
Excellent thread. Excellent posts.
---The question is: When stocks, bonds, gold, & USD all tank (as of late)......where do you hide??? What is NOT correlated?
Quote from MR.NBBO:
Yes, But that's USD denominated.......back to the USD decline problem........when you lose money, even sitting in cash!
CHF/EUR/GBP money market funds then??!!! :eek:
The Dollar index has been climbing since mid February. I've added a statement to my prevous post that might help you. Also, read the 3rd paragraph of this post. It depends upon your base country currency.
http://www.elitetrader.com/vb/showthread.php?s=&postid=483009#post483009
pspr has outlined what happens in the secular (long term) trend.
there are days and weeks where the relationships go awry, such as an event like 9/11.
in times of panic, people tend to assume the lowest risk profile (understandable) by converting assests into whatever is negotiable, be it the dollar or gold or wild hickory nuts.
if your creditors will accept wild hickory nuts, you sell your Dec. corn contract and buy spot hickory nuts.
there are days and weeks where the relationships go awry, such as an event like 9/11.
in times of panic, people tend to assume the lowest risk profile (understandable) by converting assests into whatever is negotiable, be it the dollar or gold or wild hickory nuts.
if your creditors will accept wild hickory nuts, you sell your Dec. corn contract and buy spot hickory nuts.