Stocks & Bonds: A Great Macro Trade?

The above chart shows us what would be our return if we purchased the S&P 500 ETF (SPY) proxy, and an equal amount of 20+ year maturity treasury ETF (TLT) proxy shares after the major stock market correction in 2011 (August). Holding these two positions would have yielded us roughly 40% solely from price appreciation, with dividends adding another 4% or so.

There is no question that there is a short-term inverse relationship between stocks and bonds… risk-on speculative positions are usually expressed through purchasing stocks and other risky assets, while simultaneously selling safe havens such as treasuries. However, in the longer run this does not have to be the case… there are certainly instances where stocks and bonds can fall and rally together over a certain period of time, and this has been the case for the past couple of years. Purchasing stocks on the lows on 2009 and holding to present would have returned us 100% through price appreciation, while during the same, bonds would have returned us 25%.

Why is this Occurring?

The reason for this longer-term rally in both stocks and bonds has been documented by myself in the past. Let’s explain each market separately. Money continues to flow into the treasury markets for basically three major reasons:

1. Global economic pressures force investors to flee into safer, low-yielding assets.

2. Financial institutions are eating supply as the gap between deposits and lending widens.

3. The Federal Reserve continues to support the treasury market to lower yields and promote risk-taking.

The continued flight to stocks on the other hand is supported by similar reasons:

1. Global economic pressures, specifically in Europe and Asia, force investors to look for risk in safer geographic locations, with the United States being the preferred choice.

2. Low yielding safe haven assets force investors to search for yield in the U.S. stock market.

3. The Federal Reserve continues to provide liquidity to the economy and promotes risk-taking in stocks, further providing confidence and increasing demand in stocks.

These reasons explain clearly and in a simplified fashion for why purchasing stocks and bonds together seems to be a great macro trade. Investors simply are forced to invest in U.S. bonds and stocks, and this relationship should continue in the near future. At the time of this writing, I am bullish both stocks and bonds.