Is Hope Moving the Market?

The stock market is up today and so is the Treasury. Usually stocks and bonds move opposite each other. The idea is that when stocks are down, investors are willing to hold Treasuries with lower yields (i.e. higher prices) b/c they don’t want to hold stocks. This inverse relationship is why some investors maintain a balanced portfolio to reduce volatility.

It’s certainly not a rule that stocks and bonds must move inverse of each other. There could be any number of reasons.

I am not knowledgeable enough to tell you what the real reasons are, so I’ll give you a blatantly political guess. Investors are considering the effects of the possibility of Obama winning the election. They think that his policies will improve the economy though domestic spending initiatives aimed at the working poor. They think he will be able to rein in federal spending and reduce the budget deficit, which would result in lower interest rates (i.e. higher bond prices). So, in this story, people foresee better times and it’s driving up stocks and bonds together.

That story is about as logical as typical Wall Street Journal Op-Ed page piece, except it’s coming from the left and I admit it’s just a guess. I really have no idea whether today’s small market fluctuations having anything to do with politics. The fact that this story is plausible to me and hopefully others shows that expectations for Obama (if elected) and the new Congress are incredibly high.