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By New_Deal_democrat May 1, 2018 9:01 am
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A change of seasons: May Day update
A couple of months ago I suggested that the relationship between stock prices and bond yields was likely undergoing a secular change.

To briefly recap, between 1981 and 1998, stock prices and bond yields generally moved in opposite directions, with the primary direction being stocks rising and yields falling.  But beginning in 1998, and generally lasting until this year, stock prices and bond yields generally moved in the same direction on a day-to-day basis, while over the long term stock prices went sideways to slowly higher and bond yields continued to  decline.
In my two recent articles, I noted that bond yields -- which had declined to a point where they were actually lower than stock dividends -- and once again risen above that level. Further, it appeared that bond yields were on the cusp of breaking their long term declining trend since 1981, and likely to rise over the next 20 years or so. During this time, I suggested, smaller day to day movements would move in the same direction, while larger moves -- especially in bond yields -- would be paired with mirror image opposite moves in stock prices.

Here's what has happened in the several months since then.

As of last week, the DJIA dividend yield was 2.19%, while that of the S&P was 1.96%. Meanwhile the 10 year Treasury yield passed 3%, and even the 2 year bond was close to 2.5%.

Further, the interest rates for both 10 year Treasuries and mortgages were within 0.02% of making new 7 year highs:

Meanwhile, neither has established new lows in 5 years (although Treasuries tied in 2016). Should we actually get the new highs, then both the new highs and the lack of new lows would be unprecedented since 1981.

Finally, here's what the S&P (blue) and 10 year Treasuries (red) look like since the beginning of this year:

While their general direction was the same between February 8 and April 14, the two mirror image periods stand out. There were also 2 smaller mirror image periods in mid-February and mid-March, both of which also occurred while bond yields were rising.

I also decided to go back and check the "taper tantrum" of 2013, and the post-Brexit and post-US Presidential election periods of 2016, both of which involved significant moves higher in bond yields.
In 2016, the moves in bond prices did not result in any significant mirror image moves in stock prices:

But during the "taper tantrum," specifically from July through September of 2013, there were significant mirror image moves:

By the end of September, virtually the entire interest rate increase was over, and stock prices and bond yields began to move in tandem again.
I suspect the 2013 pattern is the template both for this year, and quite possibly for years to come.
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