The lockstep moves in stocks and bonds that have been seen for much of 2022 are easing—for now, at least.
By one measure, U.S. stocks and bond prices haven’t been this positively correlated—or moving in tandem—since at least 1999, according to Dow Jones Market Data. That’s based on the correlation between the Bloomberg U.S. Aggregate bond index and the S&P 500 over the 100 days that ended Thursday.
That relationship has started to crumble recently. Falling bond prices have sent yields higher, while stocks have staged a rebound. The moves have been surprising because rising 10-year Treasury yields have been a key source of volatility in stocks this year.
Last week, for example, Treasury prices fell for a 12th consecutive week, sending the yield on the 10-year Treasury note to some of its highest levels since 2008. Meanwhile, the S&P 500 gained 4.7% in its best week since June.
The S&P 500 hasn’t gained that much in a week when 10-year Treasury yields have jumped at least 20 basis points since June 2020, according to Dow Jones Market Data, during the early stages of the stock market's recovery from Covid-19.
It’s unclear how long this will last. On Tuesday, falling bond yields once again helped drive some of the most rate-sensitive corners of the stock market higher.
Still, Michael Purves at Tallbacken Capital Advisors said in a note to clients that the recent moves show that “we are entering a new equity valuation era" in which the stock market is less interest-rate sensitive and more reliant on earnings growth. The S&P 500 is trading at roughly the same price-to-earnings ratio as it was in June, though the 10-year Treasury yield has jumped since then.
“We are still in the middle of this transition to this new regime," Mr. Purves wrote in a note to clients on Tuesday. "As with many regime shifts, the transitions are volatile."
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October 26, 2022 at 10:43PM
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