Markets Are Moving in Mysterious Ways — and Wall Street is Struggling to Explain Why

In 2024, traditional relationships between asset classes such as stocks, bonds, currencies, and commodities like gold have once again broken down, leaving many financial experts perplexed. While some market behavior may still be influenced by the inflationary wave that swept through global markets in 2022, the exact causes of these disruptions remain unclear.

‍

One notable disruption occurred in 2022 when bonds and stocks, which typically move in opposite directions, both declined simultaneously. Although bonds briefly regained their defensive role during a stock market downturn in early August, this shift was short-lived, and the relationship between the two asset classes has yet to return to its historical norm.

‍

The complexity of current market conditions has made it difficult for analysts and strategists to provide a straightforward explanation for these shifts in long-standing relationships. As Diana Iovanel, senior markets economist at Capital Economics, noted in an interview with MarketWatch, financial professionals are discussing these changes daily, trying to make sense of what is happening.

‍

For example, both gold and the S&P 500 have been rising rapidly in 2024, which undermines gold's reputation as a defensive hedge that typically performs best during times of financial or geopolitical crises. Meb Faber, founder of Cambria Funds, highlighted the unusual nature of this situation by pointing out that never before have both gold and the S&P 500 gained 25% or more in a single year. As of Friday, the S&P 500 was up nearly 22%, while the SPDR Gold Shares ETF, a popular gold-tracking fund, had surged by over 30%, according to FactSet data.

‍

Only one year comes close to this dual rally: 2009, when stocks were recovering from the 2008 financial crisis. The continued rise in gold throughout October, even as the U.S. dollar and Treasury yields have also climbed, further disrupts historical patterns. Traditionally, gold and the dollar have shared an inverse relationship, meaning that when one rises, the other falls. However, recent data show that the correlation between these two assets has shifted toward positive territory, a rare occurrence last seen in 2022.

‍

A negative correlation indicates that two assets typically move in opposite directions, while a positive correlation suggests they move together. The ICE U.S. Dollar Index, which tracks the value of the dollar against a basket of other currencies, has risen nearly 3% so far in 2024. This, combined with the ongoing rally in gold, adds to the confusion.

‍

Strange developments have also appeared in the bond market. Treasury yields, which move inversely to bond prices, have been rising since the Federal Reserve's aggressive interest rate cuts last month. Corporate bond prices have also fallen, although not to the same extent. This divergence has led to a narrowing of the gap between corporate bond yields and Treasury yields, pushing the 50-day rolling correlation between Treasury-tracking ETFs and high-yield corporate bond ETFs into negative territory for the first time since 2022, based on FactSet data.

‍

Since October, the iShares 20+ Year Treasury Bond ETF has declined by 6.5%, while the iShares iBoxx High-Yield Corporate Bond ETF has fallen by less than 1%. The iShares iBoxx Investment Grade Corporate Bond ETF has dropped by 3.4%, according to FactSet data. These performance discrepancies highlight the growing uncertainty within the bond market.

‍

In the stock market, defensive utility stocks have seen impressive gains, pushing the sector’s year-to-date increase to more than 27%, based on FactSet data. This surge is particularly notable as it contrasts with 2023, when utility stocks were among the worst performers, while tech and communication services stocks led the market. Now, only information-technology and communication-services stocks are outperforming utilities.

‍

Some experts suggest that the rise of artificial intelligence (AI) and the Federal Reserve's interest rate cuts, which have supported high-dividend-paying stocks, may be contributing to the utilities sector's strong performance. This shift marks a significant departure from historical norms, underscoring the unusual dynamics at play in the market.

‍

Another example of market anomalies is the rise in the Cboe Volatility Index (VIX), also known as Wall Street’s “fear gauge.” In October, the VIX climbed, even though the S&P 500 remained near record highs. Typically, the VIX rises when stock prices fall, so this divergence has puzzled analysts. When the VIX briefly topped 21 earlier in the month, Goldman Sachs analysts pointed out that it is rare to see such a high reading while stocks are at record levels.

‍

There are several theories about what might be driving these unusual market behaviors. One possibility, according to Iovanel of Capital Economics, is that investors have moved beyond the “growth scares” that rattled markets during the summer. Many now expect the U.S. economy to continue growing at a robust pace, outpacing other developed economies like Japan and Europe. However, this raises the possibility that inflation could remain above the Federal Reserve’s 2% target, which could explain some of the unusual relationships seen in the stock and bond markets.

‍

The upcoming U.S. presidential election may also be playing a role. Shifting perceptions about former President Donald Trump’s chances of winning could be influencing investor sentiment, with potential implications for the economy and markets. According to Iovanel, there is a growing belief that U.S. economic growth could exceed expectations, while inflation might persist, contributing to the current market dynamics.

‍

Other analysts, including Matt and Mike Thompson, co-portfolio managers at Littler Harbor Advisors, have attributed the VIX's rise in October to election-related jitters. Meanwhile, the expectation of more persistent inflation may have contributed to the rally in gold. Suki Cooper, executive director of precious-metals research at Standard Chartered, believes central bank buying has also played a role in gold’s rise. Furthermore, geopolitical uncertainty, including events like the COVID-19 pandemic and Russia’s invasion of Ukraine, has led investors to reassess gold's role in their portfolios.

‍

In summary, the breakdown of traditional relationships between asset classes in 2024 can be attributed to a combination of factors, including inflation, geopolitical uncertainty, and shifting investor expectations about the U.S. economy and election outcomes. These dynamics have created a complex and unpredictable market environment.

‍