We have updated our privacy policy and terms & conditions. Find out more here.
0
 

Commodities And Yields Recoupling With Stocks

By  |  Market Overview  |  Feb 23, 2014 10:40AM GMT  |   Add a Comment
www.investing.com/analysis/commodities-and-yields-recoupling-with-stocks-203594
Commodities And Yields Recoupling With Stocks
By   |  Feb 23, 2014 10:40AM GMT
 

The coupling of commodities and yields with stocks ended in the middle of last year but created problems for funds that persisted in betting on such correlations for longer. Commodities started to recouple with the stock market in the third quarter of last year and yields followed last month. Is the new recoupling a sign of a replay of the 2012 good times in the stock market or the result of wishful investor thinking? Does this matter anyway?

SPY Daily
SPY Daily

On the above daily chart, the middle pane shows the rolling 60-day correlation of daily arithmetic returns of the SPDR S&P 500 ETF, (SPY) with the iShares Barclays 20 Year Treasury Bond ETF, (TLT) and the bottom pane of SPY with the PowerShares DB Commodity Index, (DBC). The vertical blue line is set two years ago, on February 21, 2012, and the values of the correlations for that date appear at the upper left corner of each pane. The values of the correlations as of the close of last Friday are shown on the right axis of each pane in black background.

The recent recoupling of stocks with yields and commodities has brought their correlations about half-way where they were two years ago. Still the correlations have a long way to go to reach 2012 levels. The question that arises here is whether these correlations are structural or a result of investor wishful thinking, i.e. the result of an ill-perception of many investors and fund managers that this market has still a long way to go and that yields will also fall, therefore there will be gains in both stocks and bonds. (Recall that when yields fall, bond prices gain). At the same time, due to their financialization via ETFs, commodities follow along.

Or is this maybe some type of a 50% - 61.8% Fibo retracement of the correlations and then we will see them close to neutral again? Note that the market need not correct to have neutral correlations as one scenario is a rise in stocks and a fall in bond prices. Of course, the other scenario is a stock market correction along with a rise in yields, something that can happen if rates rise, for example.

The key to the future course of the market is, like always, inflation and interest rates. If inflation remains low and interest rates are low, then the stock market will go higher and bonds may follow along. Otherwise, stocks will correct and bond yields will rise. But markets cannot stay high for long because of investor wishful thinking because reality is bigger than anyone's wishes; no matter how big is his portfolio.

Disclosure: no relevant positions.

Disclaimer: This blog (the Blog) is created and authored by Michael Harris (the Author) and is published and provided for informational purposes only. The information posted in the Blog constitutes the Author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You understand that the Author is not a financial adviser, that the Author is not advising, and will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information contained in the Blog may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. From time to time, the Author may hold positions or other interests in securities mentioned in the Blog and may trade for his own account(s) based on the information presented. The Author may also take positions inconsistent with the views expressed in its posts on the Blog.
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data .

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Add a Comment

 

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Commodity Index
 
 
 
Are you sure you want to delete this chart?
 
 
 
Are you sure you want to delete this chart?
 
 
 

Successfully Reported

Thank you. This comment has been flagged for a moderator.
_touchLoadingMsg