Trade tensions were the biggest reason stocks suffered their first down month of 2019 in May, but worrisome signals from the bond market contributed. What do falling yields mean for the stock market? For help answering this question, we can look at the correlation between stocks and bond yields. Stock prices and bond yields have been solidly positive correlated during this economic expansion, which means they have risen and fallen together.
As we show in the LPL Chart of the Day, the correlation between the S&P 500 Index and yields on the 10-year Treasury is currently just over 0.5—relatively high on the -1 to +1 correlation scale. That means if rates reverse and move higher, as we expect, stocks may enjoy some tailwinds.
Positive Correlation Between Stocks and Bond Yields Has Been Strengthening
“We expect yields to go higher over the balance of 2019 based on our economic growth and inflation expectations and still favorable prospects for a U.S.-China trade deal,” said LPL Chief Investment Strategist John Lynch. “We’re not dismissing the possibility of a prolonged trade war, but we think cooler heads will eventually prevail, which should help push stocks and rates higher.”
In this week’s Weekly Market Commentary, we discuss what bond market signals may mean for the stock market.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use | Tracking # 1-859189 (Exp. 06/20)