Stocks Mirroring Inflation Expectations

I’ve run this chart before but I think it captures a fascinating aspect of this market. Stock prices seem to move with inflation expectations.

The red line is the S&P 500 and it follows the right scale. The blue line is the difference between the 10-year Treasury yield and the 10-year TIPs, and it follows the left scale.

The relationship isn’t perfect–few financial comparisons are–but this one looks pretty darn good. In fact, the correlation seems to be getting stronger in recent months.

Correlation, of course, doesn’t mean causation. The two phenomena could be responding to a third. Or perhaps, the relationship is purely illusionary.

But if the chart is to be believed, then Mr. Market is a major inflation dove.

Posted by on October 11th, 2011 at 3:43 pm


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