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Unconventional Wisdom: When Stocks and Bonds Rise Together

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Greg Harmon is a founding partner and CIO of Presidium Capital Management, an asset management firm investing in separate accounts. He has over 25 years of professional investing experience. Greg writes daily at DragonflyCap, his superb blog. You can also find him on Twitter.

Conventional wisdom states that rising bond prices are bad for stocks.

The theory goes that rising bond prices means that money is being attracted to the bond market and away from or out of equities. This view gets fueled in times of turmoil or uncertainty like now due to the goings on in the Ukraine. US Treasuries have long been the place of choice to store value when any kind of global unrest occurs. A flight to safety it is called. And with the prospect of an invasion in the Ukraine, this comes to everyone’s mind. Putin’s activities could very well be keeping a bid under US Treasuries, and may pull money of of equities in the near term.

However, rising bond prices also mean falling yields, which should be good for equities. If bonds return little or no yield then equities, despite being riskier, look more attractive. So the conventional wisdom is not clear or simple.

So, if your view goes beyond the near term, it is better to pay close attention to the actual relationship between US Treasuries and Equities.

The chart above shows monthly prices of both the 30 year US Treasury Bond (upper panel) and the S&P 500 (lower panel) over the last 10 years.

There is indeed evidence in this chart for the conventional view. The most prominent is the red bar from 2008 into 2009, at the height of the Financial Crisis. This is easy to label a flight to safety. There is also a red bar in 2010 corresponding to the PIG’s (Portugal, Ireland and Greece) crisis in the Eurozone. What is interesting about these two red bars is that they occurred with US Treasuries spiking quickly and they were short lived. The second one barely impacted the US Equity move higher at all (Mental note: this was all of the Eurozone, not just one country like Ukraine). So the conventional wisdom is not totally off base.

But perhaps more interesting are the green boxes. These show periods when equities and US Treasuries  moved higher together. The most recent occasion was in 2012 when the two assets rose together for 12 months.

In addition, the period from mid-2003 to mid-2007 was a 4 year stretch when stocks and treasuries moved together. That is 4 years of moving against the conventional wisdom.

No one can say if the current joint move higher of equities and US Treasuries will last 4 years or will result in a 2008 like spike and divergence, but what is clear is that betting that equities will fall just because US Treasuries are rising is a fools game.