Stocks and Bonds Don’t Have to Be Enemies

There is a widely accepted notion that stocks and bonds aren’t best friends. Many traders and portfolio managers will sell stocks and buy bonds in order to protect assets from drops in equity prices and vise versa when bonds are deemed out-of-favor. Stocks go up then bonds go down….That’s how investing is supposed to work, right? Wrong.

The problem is, there is little reason that stocks and bonds can’t trade together, at least during certain market conditions. According to research done by Tim Hayes, the chief global investment strategist at Ned David Research, the correlation between bonds and stocks isn’t as negative as most would assume.

From MarketWatch:

Consider first a study released late last week, written by Tim Hayes, chief global investment strategist at Ned Davis Research. Upon analyzing the rolling one-year correlation between interest rates and the stock market over the last five decades, he did not find that the correlation was always or even predominantly negative, as indeed many today are so worried.

In fact, Hayes found that “significantly negative correlations between the S&P 500 and the 10-year Treasury note yield … only occurred with rates above 5%, a seemingly stratospheric level compared to today’s minuscule rates.”

From this and other data, Hayes concludes that there is “substantial room” for interest rates to rise before “deterring stock market performance.”

It’s vary easy to get caught up in the notion that equities and bonds always act inverse to one other. But other factors, as Tim Hayes addresses, must be taken into account. So while it’s important to monitor interest rates and price action in the bond market and the impact it may have on equities. We can not assume that the two markets will always have inverse price action.

Source: What could sabotage this stock market? (MarketWatch)

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