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Expand chart
Reproduced from S&P Dow Jones Indices; Chart: Axios Visuals

An important dynamic in financial markets has flipped, for now at least.

Why it matters: Stock and bonds are usually inversely correlated — when stocks go up, bond prices move down.

  • When invested in both, this diversification helps suppress volatility in the value of a portfolio.
  • However, both have recently been moving together in the same direction, making investors' portfolios more susceptible to volatility.

Driving the news: Since May, the six-month trailing correlation has been positive between stocks — as measured by the S&P 500 — and bonds as measured by the 10-Year Treasury note.

  • This happens occasionally for brief periods of time. The last time correlations went positive was in late 2013 during the "taper tantrum," an episode where Treasury yields surged following the Federal Reserve’s announcement that it would be tapering its then quantitative easing program.

The big picture: Over the past 40 years, yields have generally trended lower in what can be characterized as a low-inflation environment.

  • Charles Schwab chief investment strategist Liz Ann Sonders tells Axios this type of low-inflation environment fosters negative correlation because yields moving higher (i.e. when bond prices fall) signals things like improving growth, which is bullish for stocks.

The latest: Today, inflation is the big risk everyone’s talking about.

  • "We don't know whether it's going to be long lasting or transitory," Sonders says. "But for now, we've seen that reversal."

What to watch: Inflation data, like Tuesday’s hotter-than-expected Consumer Price Index report, bear watching over the next few months to see if prices cool off and correlations go back to being inverted.

  • "If indeed, it's a secular shift, that has huge implications for market behavior for how you diversify," Sonders says.

Go deeper

Oct 15, 2021 - Podcasts

The bad and the good in the latest inflation data

The global energy crisis is causing a whole series of economic headaches, not the least of which is inflation. The Consumer Price Index, the best American measure of inflation, jumped 5.4% in September, compared to last year. That's according to new data out this week.

  • Plus, the fallout of bigotry in the NFL.
  • And, celebrating Latino ingenuity to close Hispanic Heritage Month.

Guests: Axios' Felix Salmon and Kendall Baker, and Telemundo's Marina Franco.

Credits: Axios Today is produced in partnership with Pushkin Industries. The team includes Niala Boodhoo, Sara Kehaulani Goo, Dan Bobkoff, Alexandra Botti, Nuria Marquez Martinez, Sabeena Singhani, Alex Sugiura, Lydia McMullen-Laird, Michael Hanf, and David Toledo. Music is composed by Evan Viola. You can reach us at podcasts@axios.com. You can text questions, comments and story ideas to Niala as a text or voice memo to 202-918-4893.

Go deeper:

This is what a profit margin squeeze looks like

Expand chart
Data: U.S. Bureau of Labor Statistics; Chart: Jared Whalen/Axios

Two inflation indexes out this week, taken together, show how companies’ margins are getting squeezed.

Why it matters: Corporate earnings growth, while still historically high, is receding from record second-quarter levels. Margins will be a huge focus during Q3 earnings calls this month.

Ina Fried, author of Login
54 mins ago - Technology

Intel CEO sees making own chips as a matter of national security

Pat Gelsinger. Photo: Axios on HBO

Intel CEO Pat Gelsinger is putting the pressure on the U.S. government to help subsidize chip manufacturing, insisting the current reliance on plants in Taiwan and Korea as "geopolitically unstable."

Why it matters: There is bipartisan support for funding the domestic semiconductor industry, but Congress has yet to sign the check. The Senate has passed the CHIPS Act that includes $52 billion in semiconductor investment, but it has yet to pass the House.