High correlation between stocks and bonds

Up to now in 2022, shares and bonds have each bought off, main buyers with a balanced portfolio to expertise traditionally painful drawdowns. Charges have risen, and partially due to this truth, equities have had a troublesome yr. The S&P 500 ETF (SPY) is down 16.0% on a YTD foundation, whereas the iShares Core US Mixture Bond ETF (AGG) has shed 11.3% of its worth. Sometimes, charges fall alongside equities, as buyers shift their capital allocations to safer property. 2022 has been totally different, although, and has seen promoting in each bonds and equities. This has resulted in a historic degree of constructive correlation between the ETFs SPY and AGG going again to 2004 when AGG first began buying and selling.

Though the 200-day correlation between shares (SPY) and bonds (AGG) has been larger as soon as earlier than (in late 2009), the present degree stays notably elevated. The present 200-day correlation sits at 0.87, which signifies a powerful constructive relationship. Within the final 200 days, shares have moved in the wrong way of charges on most days, because the market is extremely centered on the bond market because the Fed transitions from an accommodative to a restrictive stance within the face of upper inflation. Apparently, the correlation coefficient does seem like rolling over, shifting decrease in every of the final 15 buying and selling periods. Traditionally talking, the correlation coefficient has tended to show detrimental not lengthy after rolling over, as illustrated by the chart beneath.

The extra we zoom in, the extra the rollover turns into clear. The upper-frequency measures, such because the 100- and 50-day correlation coefficients, have already moved considerably off of their latest highs, despite the fact that they’re nonetheless elevated relative to historical past. The 100-day correlation coefficient is now at simply 0.70, whereas the 50-day coefficient is even decrease at 0.55, the bottom ranges since mid-June and mid-Could, respectively. This tells us that the 200-day correlation will probably pull again additional, thus giving SPY an opportunity to realize at the same time as charges rise, and visa-versa. As proof of this, on Tuesday SPY was down over 125 foundation factors at the same time as AGG was up 6 bps, shifting in reverse instructions. To make an extended story brief, bonds and shares might start to diverge when it comes to efficiency because the correlation between the 2 property begins to roll over. Now you simply have to determine which route they’ll every go!

The rolling 100-day correlation between shares and bonds has been over 0.5 (or 50%) for 129 buying and selling days, which is the longest streak because the inception of AGG by a substantial margin. Though the coefficient is declining, the 100-day correlation would want to drop one other 0.2 factors for this streak to finish.

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