Granted, there are a number of things with the potential to spook stock investors. Russia-Ukraine dampens enthusiasm for European equities and has the potential to drag on U.S. equities. Similarly, exorbitant valuations in the small-cap arena can eventually bog down “overvalued” larger-caps that have ignored questionable fundamentals for years due to easy monetary policy. The ultra-accommodative Federal Reserve, however, is slowly removing air from the lend-n-spend tire.
From my vantage point, investors need to heed the bond market’s admonition. In the 6-month period between 8/7/13 and 2/6/2014, the S&P 500 SPDR Trust (SPY) and long-dated Treasuries via iShares 20+ Treasury (TLT) had a strong negative relationship. Its rolling 6-month correlation resided close to -0.70%. Stocks up, bonds down… and vice versa.
Now take a look at the 6-month period 2/7/2014 through 8/6/2014. Both SPY and TLT have nearly appreciated in lock-step. Positive relationships between these assets do not typically last as long as they already have, implying that something has to give. The S&P 500 SPDR Trust (SPY) could succumb to the pressures associated with normal stock market corrections. Conversely, iShares 20+ Treasury (TLT) might fall victim to rocketing long-maturity yields and simultaneous price depreciation. The least likely outcome would be SPY and TLT continuing to move in the same direction as one another.