Changing corr. btw S&P and 20 yr gov bond

Corr btw total returns of S&P and 20 yr gov bond from 1988 to 1998 is roughly 45%, but from 1998 to 2014 is -55%.

Any expert opinions on why the correlation could have changed from positive to negative?

read the stuff on business cycles in L3.

something like this…

Looking at that chart I’d say we are no in stage 6. Nicht gut

i’d say ‘early recovery’ (stage 4) now.

bonds going down, equities still rising.

Tell that to the commodities markets!

One of the things about correlations is that they depend on the periodicity of your measurements.

For example, there might be a lot of switching between stocks and bonds on a monthly basis from rebalancing, so you might find that stocks and bonds are inversely correlated on a weekly to monthly baisis.

On the other hand, both stocks and bonds are priced to deliver returns over the long run, and so you might discover that yearly stock-bond performance is positively correlated.

Those two example is just an illustration of why things can change depending on your periodicity, there are reasons that those specific correlations might not be true in a specific period or data that you use.

So it’s not too surprising that the correlations might change around, particularly if the correlations are drawn from longer-period returns (years, rather than days or weeks).

I don’t know why the correlation changed, but there are possible reasons on both the stock side and the bond side. On the stock side, it may be that 1998 is where the benefits of internat and technologization fo the US economy reached a tipping point, and the post 1998 world is mostly a recovery from the tech bubble and the follow-on crises where changing fed rates was a very deliberate policy to stimiulate the economy and by extension the stock market. This was always the case, but interest rates have become much more tightly coupled policy since the tech bubble, since the economy (other than a few years in the mid-aughts) has seemed to be in near-constant recovery mode since then.

On the bond side, the long term trend of lowered bond rates may have gotten to the point where rates are so low that the capital gains from lowered rates are inconsequential compared to the fact that coupons are so low to begin with, so that bond returns are low while stock gains (for now) appear high.

Again, the periodicity of your returns calculation is likely to have a big effect on what correlations you observe in this case.

Equities still rising? They may not have crashed, but looking at a multi year chart right now looks like stocks are on the verge of rolling over. They could start going up again, I suppose, but it’s hardly rocketing up.

In any case, this business cycle isn’t really a normal one, because the last crash was triggered by a credit crisis, which meant that bonds crashed too (though not treasuries).

It will be interesting to see how things react to interest rate rises, whenever that actually happens. On the one hand, interest rate rises are interpreted as a good thing, because it suggests that “the fed is doing the right thing,” “the economy must be strong enough to absorb them,” etc… Yet if rates go up, then pretty much everything else gets discounted at a higher rate, so it seems that prices must come down. It’s like people who are excited about getting punched in the face. Hey, Russians are kinda like that.

The data I used was quaterly, and corr does come down noticeably when I use monthly data.

Thanks everyone for your insights!

dafuq

Ohai posted some video a while back about Russians gathering en masse to have fun beating each other up. It’s some kind of winter festival to say “So glad it’s cold again” or something. I looked on youtube and found a few things that are similar, but nothing quite like Ohai’s video.

It was a bit like the beginning of this video, except that it was snowy and the guys were bare chested and they were bare fisted. My reaction was: “What? They do this for fun???” IIRC, our Russian members confirmed this tradition is real.

[video:https://www.youtube.com/watch?v=fVNf0qK9Iss]

EDIT: This was not an attempt to diss Russians, it was more being impressed that they don’t mind doing that.