Buy Bonds, Sell Stocks: A Tale of Two Market Regimes

Even the most casual observers of financial markets seem to be aware of the old adage: Buy Bonds, Sell Stocks and its inverse. But how true has this market lore been in recent years? We examine this question via the following 2 charts, which plot the daily log changes in the SPY against those in TLT. In order to highlight changes that have taken place since the start of the financial crisis, we have broken down the time periods into pre-2008 and post-2008.



In both periods we see a clear inverse relationship: when stocks are up, bonds are down and vice versa. However, we can see that the relationship has gained in strength since 2008:

  • Prior to 2008 the daily correlation was -0.36
  • After 2008 the daily correlation jumps to -0.49

It would seem that successive rounds of QE have ruined some of the benefits of diversification. After the subprime crisis we are more likely to see days in which stocks and bonds follow wildly opposite paths.

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