Correlation is a statistic that describes the degree of relationship between two assets.
Correlations have always existed in financial markets.
The correlations can be direct or inverse. Many of these correlations have changed over the years.
For example, the stock market and the bond market have always been negatively correlated.
When an economic recession approached, investors moved from the stock market to a more secure bond market.
Following the ongoing interventions of Central Banks, interest rates have fallen to almost zero. The correlations have changed significantly.
Today, when the stock market falls, the investor does not redirect his savings to bonds. Interest rates dominate the game.
An increase in interest rates results in both a fall in the stock market and the bond market.
If interest rates rise, the cost of money increases and the real economy and GDP are affected. This leads to a worsening of the outlook for almost all equities and the markets are falling.
Correlation between Bond and Stock Market
However, the rise in rates also causes a decline in bonds. The bonds give the investor an annual rate of return and repayment of the capital at maturity.
During its life, the obligation can increase or decrease its value just like action.
Suppose you have a 3% annual bond portfolio and the rates for those same bonds are starting to rise to 6%.
Bonds with a 3% rate would lose their value as those with a 6% rate exceeded them. So the bond market would lose value as well as the stock market.
Correlation between Gold Price and Stock Market
Even the raw materials have lost their historical correlations. Gold that has always been a safe haven tends to move differently.
The blame for this change could depend on the absence of inflation caused by low-interest rates.
Currencies must also be taken into account. When there is risk aversion, the dollar tends to rise as a safe haven.
Gold is traded in US dollars like oil. When the price of the dollar goes up, gold should fall, which limits its nature as a safe haven.
MORE FROM FINANCE STRATEGY SYSTEM