Market correlation

Stocks and bonds could use a good fight

December 9, 2013: 12:28 PM ET

The stock and bond markets have been moving in the same direction lately, and that has some worried.

131209114626-argument-disagreement-marriage-620xaFORTUNE -- Marriage counselors often say a certain level of disagreement is healthy. That's true for the market as well.

Recently, though, the stock and bond markets have been much cozier than usual. And that has some worried.

BlackRock, the giant asset management firm, released its 2014 outlook on Monday. The firm says that stocks look expensive right now and could "head south" next year. Included in the report is a chart that tracks how often stock and bonds move in the same direction.

Typically, we expect stocks and bonds to move in opposite directions. But this year the correlation between stocks and bonds has shot up. Heading into the year, stocks and bonds were moving in the opposite direction 80% of the time. Now, the correlation is positive -- meaning that stocks and bonds more often than not have been moving in the same direction.

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That could be a sign that investors have grown complacent. In the past, similar spikes have preceded market drops. The correlation between the stock and bond markets jumped in 1999, just before the 2000 market plunge. Correlation stayed low for a while, before going positive again for most of 2007.

Since then, stocks and bonds have been more disconnected than usual, until recently.

Of course, that doesn't mean the market is doomed. Stocks and bonds moved in the same direction for most of the 1980s and 1990s without a problem. BlackRock says that could have been the result of the long, slow drop in interest rates. BlackRock says a long, slow rise in interest rates might have the same effect.

And while spikes in correlation have tended to mean bad news for stocks and good news for bonds, the opposite could be the case this time. That's what we saw on Friday after the stronger than expected jobs report. Stocks rose and bonds fell.

Interest rates are at an all-time low. That gives investors less reason to run to the bond market if stocks look risky. That could keep money in the stock market for longer than people expect.

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