Financial markets and business cycle, mixed signals from the three major asset classes
Last Update: 25/12/2024
A look at one of the most famous relationships between financial markets and the business cycle. At the moment, no sign of a phase change appears clear from the charts.
The historical intermarket relationship between the three major asset classes (stocks, bonds, and commodities) and the business cycle tells us that the approaching end of the bullish phase of an economic cycle is anticipated by a reversal of the bond market, followed by that of the stock market, and finally by the commodities market.
Of course, any intermarket relationship should never be understood as something fixed and absolute, but trying to check the current situation can be further useful information to understand what the financial markets are telling us at this time.
The graph above compares the performance of the three main asset classes (stocks, bonds and commodities). The second row also depicts the correlation trends among the three assets.
We note the rather regular upward trend of the S&P500, placed above the 50-day and 200-day averages. In the second chart in the first row, on the other hand, we note the decline in the bond since late last summer; the indicator has pierced the 50-day average but remains well above the 200-day average. Finally, in the third chart in the first row, we observe the somewhat more convoluted trend in commodities, which in the trend (the averages) is outlined downward (the exploit of precious metals weighs). In the annual average, the stock market is weakly positively correlated with commodities and weakly negatively correlated with bonds.
While the overall situation does not seem to signal anything special at the moment, it remains interesting to keep an eye on the performance of bonds. If the downturn continues and signs of confirmation for a reversal come in, then we might start to push a little further with the analysis.
