Intermarket Analysis At Work...Stocks vs. Bonds
Instead of looking at financial markets or asset classes on an individual basis, intermarket analysis looks at several strongly correlated markets or asset classes, such as stocks, bonds and commodities. This type of analysis expands on simply looking at each individual market or asset in isolation by also looking at other markets or assets that have a strong relationship to the market or asset being considered.
Typically, there is an inverse correlation between stock and bond. When the economy is acting poorly, central bankers tend to lower interest rates to help stimulate growth. As interest rates go down, bond prices go up. On the flip side, when the economy is doing well, company profits are increasing, which leds to inflation, which causes interest rates rise to tame that inflation, which pushes bond prices do down.
NOTE: Rising rates makes it costlier for companies to borrow money because they need to pay a higher interest rate when they issue new bonds. When new bonds are issued, they push down the prices of lower-yielding existing bonds, so the rates of those bonds, match the rates of the new bonds.
There were two corrections in 2018. But I think the correction near the end of the year really spooked investors.
To the point where the Markets were predicting the Feds would hike less interest rates moving forward. Again, if the Markets are going down, interest rates hikes will halt or go down and bond prices will go up.
But even if you didn't know what was going on in the Markets or watch the news, the relationship between bonds and equities would tell you money is moving from equites to bonds (pink circle).
If you are a student of intermarket analysis, then it would know why Gold is also rising.
If you aren't incorporating intermarket analysis into your trading arsenal, you are missing out of achieving your financial goals sooner.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
It will be interesting to see if this correlation can continue if the debt bubble comes out front as an issue, specifically for corporate bonds first but could eventually get down to even what we believe are risk free assets today!
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There are definite time were assets become uncorrelated, often times due to events such as your example of corporate bonds blowing up. However, when they are correlated, it serves as an odd enhancer.