2023 Q1 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

STOCK AND BOND CORRELATION
2023
Q1
IN REVIEW
The dance between stocks and bonds is starting to shift—and it could mean that investors will have a way to play defense once again.
For a while now, stock and bond prices have moved together in lockstep. When bond yields rise, their prices fall, and that is what happened for much of last year.
From the S&P 500’s all-time high in early January 2022 to its bear market low in early October, the 10-year Treasury yield roughly doubled to almost 4%, causing
both stock prices and bond prices to tumble. The SPDR S&P 500 ETF (SPY) dropped 18% including reinvested dividends, while the iShares 20+ Year Treasury Bond
ETF (TLT) fell 31%.
But the correlation between stocks
and bonds has been starting to
change. In recent weeks, stocks
have been falling, but so have bond
yields, which means bond prices
have been rising. The S&P 500 is
down a hair from its close on March
9, right as the banking problems
started hitting the wires. In that
time, the 10-year yield has fallen to
just under 3.5%, from almost 4%.
There is a good reason for that. The
risk that markets are reflecting is
that the banking problems, if they
continue, will hit the economy, and
eventually corporate earnings.
That’s why market participants are
selling riskier stocks and rushing
into government bonds for safety, a
classic “risk-off” market.
Another way to look at the markets
is just by observing the stock and
bond correlation itself. Last year, the
S&P 500’s correlation to the price of
the iShares 20+ Year Treasury Bond
ETF reached its highest point since
2005, according to DataTrek. Now,
the correlation shows that bond and
stock prices are starting to move
in opposition to each other, which
means that bonds should be able
to perform their historical task of
providing safety.
Source: Bloomberg, FactSet, Federal Reserve, J.P. Morgan Asset Management. Market expectations are based off of the respective Federal Funds Futures contracts for December expiry. *Long-run projections are the rates of
growth, unemplovment and inflation to which a policymaker expects the economy to converge over the next five to six ears in absence of further shocks and under appropriate monetary policy.