Yesterday's Stock Market Dive Pointed to a Weird New Dynamic

Stephan Henning

Nowhere to run, nowhere to hide.

Both stocks and bonds moved down sharply Wednesday, continuing a phenomenon that emerged in the short-lived correction at the beginning of 2018.

For years, when stocks sold off sharply, bonds could be relied upon to rally. Weakness in risk assets, implying a weakening economy or worsening financial conditions, would lead to lower interest rates, lifting bond prices, especially risk-free government securities.

The investment implication had been that bonds would be the shock absorber whenever stocks hit a pothole. Stock portfolios thus would be effectively protected from risk by having a portion in bonds, so equity investors could stay all in without worry.

Not anymore.

Wednesday was only the fourth day since 2016 when the S&P 500 was down more than 1.5% while bond yields were higher, notes Peter Tchir, head of macro strategy at Academy Securities. The last time that happened was in early February, during the steep selloff during the “fiasco” surrounding the blowup of speculative vehicles that bet on continued low volatility.

“Until recently, a hard selloff in risk markets has been correlated with a flight to safety in Treasuries,” Cliff Corso, executive chairman for North America for Insight Investment, wrote in an email Wednesday. “Not today.”

This time, Tchir sees the fall in bonds—and the concomitant rise in their yields—pressuring stocks, both relatively defensive income stocks and “long duration” equities. The latter are those “unproven tech stocks” whose payoffs are far into the future and thus highly uncertain in their timing and magnitude, which makes them riskier.

Meanwhile, long-duration bonds may not be a safety asset while the Federal Reserve raises short-term interest rates and the economy grows strongly, adds Corso. Long-duration bonds fall more steeply in price for an equivalent

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