The Correlation Conundrum

Stocks and bonds have rallied sharply since the 2009 lows, delivering positive returns for equity and fixed income investors. This trend peaked in 2016, has drifted lower over the past two years and is now at risk of breaking meaningfully lower. The chart below shows the relationship between the S&P 500 and the US 10-year yield. When stocks rise and bond yields fall in the US (2009-2016), this chart shows a steadily rising trend. However, when stocks start declining and bond yields rally (and bond prices fall) (2016 - to date) the trend reverses lower. A multi-year head-and-shoulders topping pattern has formed on this chart, which is at risk of breaking lower. A break below 88 will trigger a sell signal, which equates to approximately 2,730 on the S&P 500 at 3.1% on the 10-year (or 2,800 on S&P 500 at 3.2% on the 10-year).

$SPX v $TNX.jpg

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