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The Mythical Flow From Bonds To Stocks - What's Next?

ByDragonfly Capital
AuthorGregory W. Harmon
Published 05/02/2013, 12:40 AM
Updated 05/14/2017, 06:45 AM
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Macro Analysts like to talk about the flows of money from one asset class to another. A favorite for the past year has been discussing the flow of money from Bonds into Stocks. This chatter has been enhanced by record low yields on Treasuries, the presumption that the Fed will stop buying bonds at some point and and a call to a move to riskier assets. But the Performance chart below suggest that the flow into equities since the bottom in November has not been from Bonds (TLT), but rather from Commodities. Note that since November, the S&P 500 (SPX) is up over 12% while U.S. Treasuries are up nearly 2%. There is no ‘flow’ there. But the performance of Corn, Coffee, Wheat, Soybeans, Gold, Copper, just to name six, is down 10-16%.

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This raises a few questions. First, aren’t Treasuries and the S&P 500 supposed to be negatively correlated? Apparently not. They have both been moving higher for 4 years. Second, I thought QE Infinity would create inflation. That is clearly also not the case with falling commodity prices. But the last one is the most interesting. If Commodities turn back higher, does that mean that Equities will fall? So many things to think of here. Consider the Fed fighting deflation of Commodities leading to falling stock prices. Or will rising Commodity prices be the catalyst for a flow out of bonds. The next few months should be very interesting for the relationship between Commodities, Bonds and Equities. How do you see this playing out?

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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