(MarketWatch) - Traditional relationships between stocks, bonds, currencies and commodities like gold are breaking down once again in 2024. This time, even many financial professionals are at a loss to explain exactly why.
To be sure, some of what’s happening with markets today could be due to the lingering effects of the inflationary wave that rocked global markets in 2022. Some long-standing cross-asset relationships broke down that year — perhaps most notably, bonds and stocks sold off in tandem.
Bonds briefly resumed their defensive posture when stocks hit the skids in early August. But investors have yet to see a more permanent shift toward a more textbook relationship between the two.
With so many crosscurrents impacting markets, strategists have struggled to land on a simple explanation regarding what exactly has helped to scramble other long-standing associations.
“We’re also talking about these topics every day, and trying to make sense of it,” said Diana Iovanel, senior markets economist at Capital Economics, during an interview with MarketWatch.
For example, both gold GC00 and the S&P 500 SPX have been climbing at a torrid pace this year, helping to undercut gold’s reputation as a defensive hedge that performs best during geopolitical or financial crises.
Underscoring the uniqueness of this combination, Meb Faber, founder of Cambria Funds, pointed out that there has never been a year where both the S&P 500 and gold gained 25% or more. The S&P 500 was up just shy of 22% on the year as of Friday, while the SPDR Gold Shares ETF GLD, a popular fund that tracks the price of gold, had gained more than 30%, FactSet data showed.
Only one year even came close, according to Faber: 2009, when stocks began the long recovery from the devastating financial crisis the year before.
The rally in gold has continued in October even as the U.S. dollar and Treasury yields have advanced, turning another long-standing correlation on its head.
In the past, the dollar and gold have shared an inverse trading relationship, according to a MarketWatch analysis of FactSet data. But on a 50-day rolling basis, the correlation between the two has recently moved toward positive territory to a degree unseen since 2022.
A negative correlation means two assets frequently trade in opposite directions from day to day, while positive correlation suggests they trade in the same direction.
The ICE U.S. Dollar Index DXY, which tracks the greenback’s value relative to a basket of its rivals, was up nearly 3% so far in 2024.
Some strangeness has also seeped into the bond market. Treasury yields, which move inversely to prices, have been climbing since the Fed delivered its jumbo interest-rate cut last month.
Corporate bonds have also seen their prices decline, but to a far more modest degree, based on the performance of two popular ETFs tracking high-yield and investment-grade corporate bonds.
The widening performance gap has helped pushed the spread between corporate bond yields and Treasurys to one of the narrowest levels on record.
It has also helped push the 50-day rolling correlation between the Treasury-tracking ETF and the high-yield ETF into negative territory for the first time since 2022, according to a MarketWatch analysis of FactSet data.
Since the start of October, the iShares 20+ Year Treasury Bond ETF TLT, which tracks long-dated Treasury bonds, has fallen 6.5%, while the iShares iBoxx High-Yield Corporate Bond ETF HYG is down less than 1%, and the iShares iBoxx Investment Grade Corporate Bond ETF LQD is off by 3.4%, according to FactSet data.
Within the stock market, defensive utilities stocks XX:SP500.55 have been on a breathtaking run lately, helping to push the sector’s year-to-date gain to more than 27%, according to FactSet data. Only information-technology stocks XX:SP500.45 and the tech-adjacent communication-services sector XX:SP500.50 are doing better.
That’s a dramatic departure from last year, when tech and communication services topped the market’s league tables, while utilities stocks were among the worst performers. It’s also a departure from the historical norm.
Some have argued that utilities are benefiting from the artificial-intelligence craze, while the Federal Reserve’s interest-rate cuts have helped boost stocks that pay high dividends.
There have been other examples as well. The Cboe Volatility Index VIX, better known as the VIX or Wall Street’s “fear gauge,” has risen in October even as the S&P 500 has remained at or near record highs.
When the index briefly topped 21 earlier this month, analysts on a Goldman Sachs trading desk pointed out that it was extremely rare to see such a high VIX reading with stocks at record highs.
A few theories
It’s often difficult to pinpoint exactly what’s driving markets, particularly deeply liquid ones like gold, the U.S. dollar and U.S. stocks. That said, Capital Economics’ Iovanel offered two possible explanations that might help to explain the unusual trading action of late.
Having moved on from “growth scares” that rattled stocks over the summer, many investors now expect the U.S. economy will continue expanding at a brisk pace, outstripping growth rates in other developed markets like Japan and Europe.
One consequence of this is that inflation might persist above the Fed’s 2% target. This could help explain some of the unusual relationships playing out across stock and bond markets, as the U.S. economy has so far defied economists’ expectations at seemingly every turn.
The looming U.S. presidential election has also likely played a role, Iovanel said. Shifting perceptions surrounding former President Donald Trump’s chances of victory have prompted investors to consider how his policies might influence the economy, and by extension, markets.
The bottom line is that “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 anticipated,” Iovanel told MarketWatch.
Others, including Matt and Mike Thompson, co-portfolio managers at Littler Harbor Advisors, have attributed the jump in the VIX in October to jitters surrounding the election.
Some say the expectation of more persistent inflation has also helped contribute to the rally in gold. But according to Suki Cooper, executive director of precious-metals research at Standard Chartered, there are other reasons as well.
Buying from central banks helped get the rally in gold started. But the yellow metal has also benefited from an increasingly uncertain geopolitical backdrop, Cooper said.
“There has been almost a re-evaluation of gold’s role within a portfolio,” Cooper said. “Because we have had a series of ‘black swan’ events, from COVID to Russia’s invasion of Ukraine — there have been a number of things that have driven investors to have a certain allocation to gold in their portfolios.”
By Joseph Adinolfi
