It's an interesting time in the market since last week's employment numbers. Stocks, Bonds and Gold, all are moving in lock-step. Although its very possible because different market dynamics govern each asset class, its unlikely.
Bonds are typically considered safe havens as they are less volatile and move in the opposite direction of the risk assets. At least that's the common perspective. Gold has a similar attribute. Even though historical patterns suggest that this notion of inverse correlation of Bonds and Gold with Stocks is contrary to what actually happens over long periods of time.
Recently these three asset classes are moving together, as shown below:
This correlation started from the Jobs report. It seems like everyone is happy that the Federal Reserves won't raise rates, and therefore, all assets are being purchased. However, this pattern cannot sustain for a longer period of time. And something might give.
Since Gold and Bonds are in a bull market, while stocks aren't in one, according to proprietary indicators, Stocks have the most risk right now. We have Federal Reserve's FOMC meeting next week. This meeting could really shake the markets.
So what does this really mean for investors and traders:
Bonds are typically considered safe havens as they are less volatile and move in the opposite direction of the risk assets. At least that's the common perspective. Gold has a similar attribute. Even though historical patterns suggest that this notion of inverse correlation of Bonds and Gold with Stocks is contrary to what actually happens over long periods of time.
Recently these three asset classes are moving together, as shown below:
This correlation started from the Jobs report. It seems like everyone is happy that the Federal Reserves won't raise rates, and therefore, all assets are being purchased. However, this pattern cannot sustain for a longer period of time. And something might give.
Since Gold and Bonds are in a bull market, while stocks aren't in one, according to proprietary indicators, Stocks have the most risk right now. We have Federal Reserve's FOMC meeting next week. This meeting could really shake the markets.
So what does this really mean for investors and traders:
- STOCKS: Long terms investors be wary of stocks till they can break to new highs. Although US stocks have been doing relatively well, they have huge drag from the global markets. Its unlikely for US market to break-out at a time when global macro conditions are not supporting with positive underlying currents. Therefore, stay away from this risky and over-valued asset class.
- BONDS: Uptrend remains intact even in the face of all the negative press that bonds have received over the past few weeks, suggesting that bonds have peaked. However, bonds' short-term peak is approaching. So if you can refinance at this rally, its a good time to do so.
- METALS: Precious metals entered a bull market after a long bear and have a long way to go.
Let us know if you see any other interesting correlations in the market.
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