Chart of the Day – American Exceptionalism, $SPY and $TLT

I’ve spoken to many traders recently who have pointed out the strength in bonds.  Though they’ve all noticed that bonds are flat in 2 months as stocks are higher, the reactions have been varied.

Some point to it as a sign that the bond market is more concerned than the stock market about economic growth.  Others dismiss that theory, pointing to the concurrent rise in bonds and stocks throughout the past 2 years.  They attribute the recent bond strength to more dovish talk by the Fed, plain and simple, which is bullish for stocks.  Finally, I’ve heard the theory that all U.S. assets are bid this year because other developed countries and even the large emerging markets (all the BRICs, for example) are struggling.

Among this chatter, I decided to chart the SPY / TLT ratio going back almost a decade to see whether it might signal any strong relationship.  I immediately recognized that the ratio looked almost identical to another chart I had looked at recently – the MSCI World Equity Index.  Here is the SPY / TLT ratio (orange) vs. the MSCI World Equity Index (black), going back 8 years:

Courtesy of Bloomberg

Courtesy of Bloomberg

A very close fit.  Now naturally, part of this is due to the fact that the SPY is closely correlated to the MSCI World Index in the first place.  But the SPY / TLT ratio is a much closer fit to the MSCI World Index than it is to SPY on its own (notice that both are still far away from making new all-time highs, in contrast to U.S. stock indices).

My general (unresearched, out-of-the-blue) take on this chart is that it’s another sign that global investors are more confident in American financial markets than most others around the globe, both from a growth and safety perspective.  As a result, in risk-on environments over the past 4 years, the U.S. outperforms the MSCI World index, and in risk-off environments, U.S. Treasury bonds are the safe haven of choice.  Over time, that has resulted in both a SPY and a TLT that are much higher than they were several years ago, but the ratio closely mirrors the overall ebb and flow of global equity markets as the risk environment changes.

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