Correlation between actions and obligations

It is on this basis that all investors are advised to build a “balanced” portfolio in which the distribution between shares and obligations oscillates around 50/50. Today, this fundamental proposal no longer holds the road.

For almost 30 years since 1966, according to BCA Research, in Montreal, the correlation between actions and obligations has gone into negative territory, which has helped to base the modern theory of wallets. This negative correlation was also foreshadowed during the greater part of the 20th century. When the shares in a portfolio went down, the obligations had to float, and vice versa.

Now, since 1997, the correlation between the two active categories has grown incessantly and, today, the two categories often evolve in tandem. Worse, bonds offer a negative return that is low while the stock price rises.

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This idea of ​​a shares/obligations correlation is one of them, said Judge Yanick Desnoyers, vice president and chief economist at Addenda Capital, in Montreal. “The correlation between actions and obligations is a constructive event that characterizes only to a very superficial degree the evolution of the prices of the two assets. The financial community talks about correlation, but economists talk instead about causality. »

In fact, the economist explains, the two categories of activities are subject to very distinct economic imperatives which, at times, can make them correlate, and other times, they are not. There is no directive law that governs that actions and obligations must be carried out in different directions. When economic and financial conditions dictate, their correlation increases, as is the case presented in a very fair way; and when conditions are decided otherwise, their correlation declines.

Thus, Yanick Desnoyers identifies three variables that define the “correlations” or “decorrelations” between actions and obligations: economic acceleration or deceleration, increase or decrease in inflation, rise or fall of central bank directors’ rates. “Correlation depends on the economic context,” says the economist. That’s why several have been taking it since the beginning of the year. »

For example, in a case of economic decline and rising inflation, the “correlation” will increase; however, if the economy accelerates and inflation lowers, the “correlation” will be reduced. It all happens in a way that inflation and economic downturn anticipate a deterioration in the future value of yields and influence asset prices.

“Without inflation, and even if there is a recession, a classic 60/40 portfolio will win,” explains Yanick Desnoyers. Actions are declining, but obligations are performing well: the correlation is weak. Add inflation, and we see two factors decrease: the correlation reverses. »

The third variable, that of the central bank directive rate, is called for to bolster the current strong “correlation”. “She may be a little longer,” thinks the economist. However, it will reverse with a recession, when direct rates will be high enough to sustain inflation. In the meantime, the central bank will lower its rates, which will improve the performance of obligations, which will compensate for the losses of the stock market. »

Thus, Yanick Desnoyers expects the US Federal Reserve’s directorship rate to reach 4.5 %. It will be time to replenish the bonds market, shortly before the directive rate reaches this cyclical peak.

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