Join        Login             Stock Quote

A Perverse Relationship: Equity Prices and Inflation Expectations

 November 21, 2012 10:10 AM

The stock market and the market's implied inflation forecast are still a perverse couple. That's no surprise, given the anxiety over the fiscal cliff, the economic outlook, the Middle East, and all the rest. The new abnormal, in short, is still with us and probably will be for the foreseeable future. That's no surprise, even if this reality shocks some observers who continue to consider inflation from a pre-2008 perspective.

Oh, well. Big changes in macro conditions can take a toll on some folks' ability to grasp the obvious. But recognized or not, the stock market and the market's inflation forecast (the yield spread for the 10-year Treasury less it's inflation-indexed counterpart) continue to move with a relatively high degree of positive correlation.

[Related -Is The Slump In US Manufacturing Easing?]

Over the past two months or so, for instance, the stock market has trended lower, and so has the yield spread for nominal less inflation-indexed 10-year Treasuries. What does it mean? For starters, the crowd still considers higher inflation as a positive. That's nothing new by the standard of the past four years. It's abnormal in the grand sweep of market history, of course, but it remains front and center in the current climate. (For a formal explanation of this relationship, see David Glasner's paper: The Fisher Effect under Deflationary Expectations.)

It's a safe bet that inflation expectations will diminish further if the folks in Washington allow the economy to move closer to the fiscal cliff. In that case, one should expect the stock market to follow. Yes, the new abnormal will end one day, and inflation will again be considered with a wary eye from the vantage of equities. But that day still seems like a distant prospect until the macro uncertainty is sorted out. Meantime, abnormality remains the new new thing in the dance between risky assets and inflation. Same as it ever was.
iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageEmerging-Markets Stocks Took The Lead Last Week

Emerging-markets equities enjoyed a solid rise last week among the major asset classes, based on a set of read on...

article imageDoes Your Latest Investment Pass This Test?

On Wednesday, I sounded the alarm about the problems looming for some consumer staples stocks. In short, read on...

article imageIs The Slump In US Manufacturing Easing?

Yesterday’s November survey data from the Philadelphia Fed hints at the possibility that a stronger trend read on...

article imageMarket Potentially Facing Near Term Technical Headwinds

After the S&P 500 Index pullback on Thursday and Friday last week, the market's advance on Monday and read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

It's Never Too Late To Build An Income Portfolio
More Articles on: Finance

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.