Bond-Stock Correlation Reaches Record High

The correlation between bonds and stocks has never been higher. In a 'normal' world, bond prices and stock prices are strongly inversely correlated (red shaded region in lower pane below) but the last few weeks have seen a massive regime shift (in fact the biggest shft in history) as the entire financial market becomes captured by central bank idiocy.

 

While this is interesting from a historical perspective, the question is "so what?" Well, the last few times that bonds and stocks have risen or fallen together with such co-dependence has not ended well for stocks...

  • May 2004 S&P -6.2%
  • March 2005 S&P -8.1%
  • May 2006 S&P -7.8%
  • Sept 2006 S&P No Drop
  • June 2007 S&P -12.2%... then crash

....Post-Crisis

  • July 2013 S&P -7.9%
  • March 2015 S&P -3.8%
  • Dec 2015 S&P -14.1%

And with month- and quarter-end looming after an exceptional stock move, we suspect rebalancing flows will not be kind to the sentiment-creating stock market...

but then again, Yellen, Kuroda, and Draghi may have something to say about that - no matter what.