The statistical relationship between benchmark US interest rates and the US stock market — specifically the correlation between the yield of the 10-Year Treasury Note and the S&P 500 — has unquestionably been unstable over the past decade. However, we have noticed a significant pattern.
- When the US economy is strong and investors are confident, the US stock market typically acts like a race horse on a track , blinders on, charging forward toward the next stock market-specific piece of data that it can see — like quarterly earnings or the next piece of economic data — and is generally oblivious to anything else going on around it.
- Conversely, during periods of economic uncertainty when investors are apprehensive, the US stock market acts like those meerkats on Animal Planet, cautiously taking a quick 360 degree view across the horizon every time they come out of their underground bunkers, in anticipation of imminent danger.
Right now, it looks like we’re in a Meerkat Market.
Statistically, we know this because the positive correlation between the yield of the 10-Year Treasury Note and the S&P 500 has spiked up to 76% since the beginning of the year after being virtually non-existent throughout 2011, on the heels of a race horse-like 32% advance in SPX between October 4th and April 2nd.
Per the correlation, even though recent price action alone would suggest otherwise, the recently ramped-up correlation between these two series indicates that the the market is now apprehensive and skittish — and thus vulnerable. Moreover, the further that the yield of the 10-year declines from its March 19th peak of 2.39%, the more apprehensive investors are likely to be.
Asbury Research subscribers can log into our Research Center (via the big gold button at the upper right corner of this screen) to get more specifics and detail about our current outlook for both the US stock market and US interest rates during Q2 2012, as well as our current US stock market sector picks and directional expectations for the US Dollar.