In 2024, the old connections between stocks, bonds, currencies, and commodities like gold are once again breaking down. Many people who work in finance aren’t sure how to explain why this time.
It’s possible that some of the things that are happening in the markets now are still affecting them from the price wave that hit the world in 2022. Some long-standing links between assets broke down that year. For example, stocks and bonds both went down in value at the same time.
When stocks went down in early August, bonds temporarily went back to being defensive. But buyers still haven’t seen a more permanent change in the two situations so that they are more like they should be.
Because markets are affected by so many different currents, strategists have had a hard time coming up with an easy explanation for what has helped to mess up other long-standing relationships.
“We also talk about these things every day and try to make sense of it,” Diana Iovanel, senior markets economist at Capital Economics, told BourseWatch in an interview.
As an example, both gold GC00 0.43% and the S&P 500 SPX -0.03% have been going up very quickly this year. This has hurt gold’s image as a defensive asset that does best during political or economic crises.
Meb Faber, head of Cambria Funds, said that there has never been a year when both the S&P 500 and gold gained 25% or more. This shows how unique this combination is. One famous fund that tracks the price of gold, the SPDR Gold Shares ETF (GLD 0.21%), had gained more than 30%, while the S&P 500 had gained just under 22% for the year.
“Only one year even came close,” said Faber. That year was 2009, when stocks started their long recovery from the terrible financial disaster of 2008.
In October, gold prices kept going up even though the U.S. dollar and Treasury yields went up. This broke another long-standing link.
MarketWatch looked at FactSet data and found that the dollar and gold have traded in opposite directions in the past. The link between the two, on a 50-day rolling basis, has recently moved towards positive territory to a level not seen since 2022.
If two assets have a negative correlation, they tend to trade against each other every day. If they have a positive correlation, they tend to trade in the same way.
The strength of the dollar against a group of other currencies is tracked by the ICE U.S. Dollar Index DXY 0.25%. It is up almost 3% so far in 2024.
The bond market has also become a bit strange. Since the Fed’s big interest rate cut last month, Treasury yields have been going up because yields move against prices.
Based on how well two famous ETFs that track high-yield and investment-grade corporate bonds have done, the prices of corporate bonds have also gone down, though not as much.
The difference between the yields on corporate bonds and Treasurys is now one of the smallest it has ever been. This is because the performance gap is getting bigger.
MarketWatch looked at FactSet data and found that the 50-day rolling correlation between the Treasury-tracking ETF and the high-yield ETF went into negative territory. This is the first time since 2022 that this has happened.
The iShares 20+ Year Treasury Bond ETF (TLT-0.56%), which tracks long-term Treasury bonds, has dropped 6.5% since the beginning of October. The iShares iBoxx High-Yield Corporate Bond ETF (HYG -0.10%) is down less than 1%, and the iShares iBoxx Investment Grade Corporate Bond ETF (LQD -0.24%) is down 3.4%.
According to data from FactSet, safe utilities stocks SP500.55 -1.46% have been on a crazy run lately. They’ve helped the sector gain more than 27% so far this year. Information technology stocks (SP500.45, 0.59%) and communication services stocks (SP500.50, 0.71%), which are related to technology, are the only ones doing better.
This is very different from what happened last year, when tech and communication services did very well and energy stocks did very poorly. It’s also different from what has happened in the past.
Some people say that the interest in artificial intelligence is good for utilities, while the Federal Reserve’s interest rate cuts have been good for stocks that pay high profits.
There have also been other times like this. You may know this index as the “VIX” or “Wall Street’s fear gauge.” It has gone up in October while the S&P 500 has stayed at or near record highs.
When the index briefly went above 21, earlier this month, traders at Goldman Sachs said it was very unusual to see a number that high while stocks were at all-time highs.
Several ideas
It’s not always easy to figure out what’s going on in markets, especially ones that change hands a lot, like gold, the U.S. dollar, and U.S. stocks. At the same time, Iovanel of Capital Economics came up with two possible reasons for the strange trade behaviour lately.
After getting over the “growth scares” that shook stocks this summer, many investors now think the U.S. economy will continue to grow quickly, faster than other developed markets like Japan and Europe.
Because of this, inflation may stay above the Fed’s goal level of 2%. This might help explain some of the strange links between the stock and bond markets. The U.S. economy has been surprising economists at almost every turn so far.
He also said that the upcoming U.S. presidential race may have had something to do with it. As people’s ideas about former President Donald Trump’s chances of winning have changed, investors are thinking about how his policies might affect the economy and, by extension, the markets.
In the end, Iovanel told MarketWatch, “there’s a higher likelihood that’s priced into the market that growth will be stronger and that inflation will not stay at target as expected.”
Others, like Matt and Mike Thompson, co-portfolio managers at Littler Harbour Advisors, say that the October jump in the VIX was caused by nerves about the election.
Some people say that the belief that inflation will stay high for a longer time has also helped the price of gold rise. But Suki Cooper, who is the executive head of precious metals research at Standard Chartered, says there are other reasons too.
Central banks buying gold made the price of gold go up. Cooper said that the yellow metal has also done well because of a world that is becoming less stable politically.
“Almost everything about gold’s place in a portfolio has been rethought,” Cooper said. “Because of a number of “black swan” events, such as COVID and Russia’s invasion of Ukraine, investors have made sure that gold is a part of their portfolios.”
