Trade tensions were the biggest reason stocks suffered their first down month of 2019 in May, but worrisome signals from the bond market contributed. What do falling yields mean for the stock market? For help answering this question, we can look at the correlation between stocks and bond yields. Stock prices and bond yields have been solidly positive correlated during this economic expansion, which means they have risen and fallen together.
As we show in the LPL Chart of the Day, the correlation between the S&P 500 Index and yields on the 10-year Treasury is currently just over 0.5—relatively high on the -1 to +1 correlation scale. That means if rates reverse and move higher, as we expect, stocks may enjoy some tailwinds.
Positive Correlation Between Stocks and Bond Yields Has Been Strengthening
“We expect yields to go higher over the balance of 2019 based on our economic growth and inflation expectations and still favorable prospects for a U.S.-China trade deal,” said LPL Chief Investment Strategist John Lynch. “We’re not dismissing the possibility of a prolonged trade war, but we think cooler heads will eventually prevail, which should help push stocks and rates higher.”