Wednesday, May 1, 2013

Market Correlation

Some analysts set about crunchin'
A proven statistical function
For why stocks and debt,
Which used to offset,
More recently move in conjunction.

At the end of it all they succeeded,
Having crunched all the data they needed,
Finding no other fact
So truthfully tracked
As expected expanse of QE did.

Of course, there is a lot more to the movement of equity prices than quantitative easing, but the correlations between rising stock and bond markets in the recent past are striking and, as far as I know, unprecedented (at least, when they are both rising). The "missing link" appears to be the massive, monthly $85 billion purchases by the Fed of Treasury and mortgage bonds, which has had the effect of bidding up both the price of bonds (directly) and stocks (indirectly, by lowering the yields on "safe" assets and inducing investors to get riskier in search of returns). I was reminded of this when my friend and one-time mentor Sam Costanzo posed the question on his Facebook page. Sam, whose Facebook wall is a trenchant financial and economic blog for his lucky friends, also threw in commodities and currencies for good measure, and concluded: "Either the economy and global growth begin to look up, supporting commodities and putting downward pressure on Treasuries and the dollar (lifting the Euro and halting the decline of the yen) or equities could be dragged down into a significant correction."

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