I read this article from Bloomberg Monday morning and it is still stuck in my mind today. 

From the article: “For the first time since the financial crisis started, U.S. shares are moving independently of the bond market, a sign that profits and valuations are guiding investors more than concern about the economy.”

The article supports this statement by observing the 30-day correlation coefficient for the S&P 500 and 10-year Treasury yields.  Correlation is a statistical measure of how two securities move in relation to each other. 

A +1 correlation coefficient implies that the two securities will move in lockstep in the same direction.  A -1 correlation coefficient means that the two securities move by an equal amount in the opposite direction.  A correlation coefficient of 0 indicates no relationship and that the securities movements are completely random from each other.

During a crisis, asset classes tend to become more highly correlated as the market’s psychology shifts to panic mode, all asset classes became highly correlated.  As the panic subsides and a recovery takes hold, correlations break down.  This is because investors perceive a difference in the return potential for stocks versus bonds.

According to the article, correlation of the S&P 500 and the 10-year Treasury yield has fallen from a record of 0.89 to -0.42.  This means that stocks and bonds are again moving in opposite directions – a very welcome sign of normalcy in the markets.

The article also attributes lower correlations to the market’s reactions during the most recent earnings season.  For the first time in three years, companies beating earnings estimates rallied and those that missed fell on average. 

Markets still face a number of challenges, but I believe these signs of normalcy are very big positive and worth being thankful for.

Happy Thanksgiving!

Peter Lazaroff, Investment Analyst

www.acrinv.com