Relative Strength of Stocks Versus Bonds

Relative Strength of Stocks Versus Bonds

The chart above displays the relative strength of the S&P 500 versus the long bond (30 year US Treasury Bond). When the line is rising, it indicates that stocks are outperforming 30 year treasury bonds, while a falling line indicates that bonds are outperforming stocks.

The relative strength chart above clearly shows that bonds have been outperforming stocks the last few months. The type of bonds we hold in our model portfolios are comprised of a diverse group of holdings, i.e., government agency bonds, corporate bonds, high yield corporate bonds, etc.

When the financial news networks, such as CNBC, refer to bonds they are generally referring to either the 10 or 30 year US treasury bonds. The long maturity bonds will fluctuate based on both interest rate changes and changes in the bullishness or bearishness of the stock market. Money will move out of safe haven treasuries and into the market as stock market rallies take hold and vice versa when stocks fall.

Unlike treasuries, high yield bonds act more like a proxy for the stock market. If the stock market rises high yield bonds tend to rise.

If the stock market rally that began late last week proves to have staying power, I will be adding to our high yield bond positions.