Is a declining bond market a prescient warning of a declining stock market?

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Is a declining bond market a prescient warning of a declining stock market?

Post by goodenyou »

I haven't heard this before, but I recently heard a talking head make this statement. He made the statement that the bottom hasn't begun to fall out of the stock market because there is no sign of capitulation in the (corporate?) bond market. True or not? What say you?
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by z3r0c00l »

Not a chance, if anyone knew this with confidence, they wouldn't tell a soul and bet on it, making a fortune. Not a single person knows what the stock market will do tomorrow or for the rest of the year.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by Ron Scott »

No it is not
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by unclescrooge »

If anything, it indicates a booming economy. Which it does.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nisiprius »

No. Historically, stocks and bonds have moved completely independently of each other.

Oh, and "prescient warnings" are few, perhaps nonexistent. Everything gets filtered by hindsight bias and by self-promotion. For example, "permabears" keep predicting stock market crashes, and when one finally occurs they get credit. If they predict a crash and one happens three years later, their fans say "they weren't wrong, just early."

Generally speaking, when I hear the word "capitulation" I feel that someone is trying to make predictions based on their intuitive sense of market psychology. Unfortunately, market psychology is practically impossible to validate, prove, or disprove. You can track one particular guru and see how good their predictions have been, and usually it turns out to be about coin-flip accuracy. If you're going to act on this kind of nonsense, at the very least make sure it is your own personal judgement you are using, not the judgement of someone else who sounds really confident.
Last edited by nisiprius on Wed Oct 31, 2018 11:04 am, edited 1 time in total.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nedsaid »

nisiprius wrote: Wed Oct 31, 2018 10:54 am No. Historically, stocks and bonds have moved completely independently of each other.
Except for 1984-1999. But yes, this is mostly true.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by goodenyou »

Let me re-phrase the question to see if it changes your opinion:

In a declining stock market, does a (simultaneous) declining bond market portend a dramatic fall in the stock market?


#Edited for spelling
Last edited by goodenyou on Wed Oct 31, 2018 11:19 am, edited 1 time in total.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nisiprius »

nedsaid wrote: Wed Oct 31, 2018 11:01 am
nisiprius wrote: Wed Oct 31, 2018 10:54 am No. Historically, stocks and bonds have moved completely independently of each other.
Except for 1984-1999. But yes, this is mostly true.
Not sure what you mean. Are you asserting positive correlation or negative?

The correlation of VFINX and FBNDX (a Fidelity bond fund that goes back to 1984) was +0.21. That's not very high; I'd still call that "independent."

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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nisiprius »

goodenyou wrote: Wed Oct 31, 2018 11:07 am Let me re-phrase the question to see if it changes your opinion:

In a declining stock market, does a (simultaneous) declining bond market portent a dramatic fall in the stock market?
Haven't looked at the data yet, but I'd say it is the expected and normal reaction to a rise in interest rates, which have a negative effect and both stocks and bonds, possibly for the same reason (lower discounted present values of the future income stream).
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nedsaid »

nisiprius wrote: Wed Oct 31, 2018 11:08 am
nedsaid wrote: Wed Oct 31, 2018 11:01 am
nisiprius wrote: Wed Oct 31, 2018 10:54 am No. Historically, stocks and bonds have moved completely independently of each other.
Except for 1984-1999. But yes, this is mostly true.
Not sure what you mean. Are you asserting positive correlation or negative?

The correlation of VFINX and FBNDX (a Fidelity bond fund that goes back to 1984) was +0.21. That's not very high; I'd still call that "independent."

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What I am saying is that both stocks and bonds both went up during the 1984-1999 period. Interest rates and inflation fell during that time giving stock investors a gigantic wind at their back. We had a monster bond bull market from about 1983-2013 and a monster stock bull market from 1984-1999.
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Re: Is a declining bond market a prescient warning of a declining stock market?

Post by nisiprius »

goodenyou is asking "In a declining stock market, does a (simultaneous) declining bond market portend a dramatic fall in the stock market?" That turns out to be a difficult question to answer, because it doesn't occur in a major way very often, so it's necessary to define what's needed.

Let me make a tentative definition, one that can be easily tested just by looking at a published data table, and I'm making it before I go and look in the SBBI data. Let's say that "a declining stock market with a simultaneously declining bond market" occurs when large-company stocks and long-term corporate bonds both have a negative total return over the same calendar year. And I'll judge whether there was a "dramatic fall" by looking at the total return of the stock market for the subsequent year.

It turns out that this there were four years in which large-company stocks and long-term corporate bonds both declined: 1931, 1969, 1974, and 1981.

1931: the stock market, already 60% down from the 1929 peak, declined another -8.19% 1932. I score that a miss.
1969 was -8.50% fall after two good years. In 1970, the market gained +4.01%. Another miss.
1974 was followed by a +37.20% gain in 1975, a miss.
1981 was followed by a +21.41% gain in 1982, another miss.

You can play with the numbers various ways, but even if you don't like my crude approach, if there were a real and a strong relationship you wouldn't expect four misses out of four.

So, no, I'm not impressed with simultaneous declines in stocks and bonds as a useful predictor of dramatic falls in the stock market.
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