Stock Bond Ratio

I’ll be in a dentist’s chair by the time you read this, but I didn’t want to leave you with nothing to think about while I get my first crown put in.

Fascinating chart, showing the ratio of S&P500 to T-Bond. This implies (at least over the past few years) that there is a finite relationship between the two that oscillates. (I’d love to see much more data on this — at least another 30 years or so).

Dennis Gartman noted:

"It makes rather clear that once bonds begin to gain upon debt (as they did back in ’99… or again in early ’04), they tend to continue to do so for a very long while. But once the old trendline is broken, it is usually definitive and we can trade in this new direction for many months, knowing that the new trend has some very real staying power. The trend toward equities outperforming debt continues apace. Trade then accordingly, buying stocks whilst selling debt."

Fascinating relationship:


Graphic courtesy of MacroMavens (via Dennis Gartman)

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  1. Jdog33 commented on Oct 5


    This blog has so over shot the sub-prime situation it isn’t funny. The market has now priced it fully in and as you can see from the Merrill news, NOBODY but you, Gary Schiller, Peter Schiff and Dougie Kass CARE anymore. If I read one more article from Hussmann about how the S&P is 50% overvalued, I’m going to upchuck.

    Let’s move on to how to make some money on the long-side vs harping on how doomsday is right around the corner and the US markets are going to crash.

    I can’t tell you how many hedges I have bought over the last 18 months from reading this blog. I take full responsibility for my actions, but if you could be a LITTLE more objective and come from BOTH sides of the coin, it would really give your readers a better feel for what is happening in the market. I think you have COMPLETELY missed the global boom and the impact of the weak dollar on corp. earnings. You have also totally underestimated the stamina of the consumer. Yes, the economy is slowing – we have all known that for a year now. Let’s hear about something that will move the markets that isn’t / hasn’t already been priced in. That is value added info.

    Love the blog, but if you get too many like minded individuals all posting the same doom and gloom all the time, it gets old after a while. The lack of a back and forth dialog on the BP is amazing.

  2. Buford P. Stinkleberry commented on Oct 5

    Jdog33, I think if you lived among mere mortals (people not making 6 figures– and I don’t mean 7 seven figures) you’d see the real world. It isn’t so rosy, and there are political issues in the next 20 years that will impinge on the macroeconomic picture that I think you are oblivious to.

    That doesn’t mean you can’t clean up in the short run.

  3. Ottnott commented on Oct 5

    Wow. I sure would be hesitant to read much out of 1 1/2 cycles in a period with a lot of historical oddities.

    Here’s a much longer-term perspective, using 20-year bonds, from

    It can be difficult to follow the charts, because he breaks up the timeline and changes the scale when moving from the older chart to the one showing the 1960-present.

    What he uses as a trading indicator is not the ratio itself, which is in a decades-long uptrend rather than being cyclical, but instead a technical indicator of momentum.

    His conclusion, if you want to get straight to that:
    Right now, the KST is rising and is at a relatively overbought reading. This monthly series is not showing any signs of peaking, but when we look at its more sensitive weekly counterpart in Chart 3, a different story emerges.

    At last Friday’s close, it was teetering on the brink of a major sell signal.

    … Remember, the proven trend for this relationship favors stocks until the line is violated, so it would be wrong to anticipate a negative break before it happens. However, if the break does materialize, it would be a strong signal that bonds and bond equivalents, such as utilities and preferreds, are the assets of choice. It would not indicate that stocks are headed lower because this is a relative relationship. However, on most occasions when the ratio declines, it does so because equities are weak.

  4. Ottnott commented on Oct 5

    Nobody here is blind to the trends you mention.

    Likewise, we are not blind to the stresses that have been building up as a result of the trends.

    Your comments about stock prices sounds almost identical to many, many comments I read and heard about housing prices in 2005. Since then, housing prices have come down in the absence of recession or large increases in rates for fixed-rate mortgages.

  5. F commented on Oct 5

    This is one of the stupidest things I’ve seen on this blog. T-bond prices do not vary significantly from $100. Therefore, a graph of S&P500 to T-bond price is going to a mildly distorted graph of the S&P500 divided by 100. Any cycles you observe in that graph will also be present in the S&P500. Yeesh.

  6. F commented on Oct 5

    Or look at the second graph in Ottnott’s link. I clearly oversimplified in my last post, but there’s no question that the graph you present is severely misleading.

  7. VJ commented on Oct 5


    ’07 Mortgage-Backed Bonds Even Shakier

    Subprime-mortgage bonds created in the first half of 2007 contain loans that are going delinquent at the fastest rate ever, Moody’s Investors Service said yesterday.

    The average rate of “serious loan delinquencies” in the securities has been higher than for bonds created last year, Moody’s analysts Ariel Weil and Amita Shrivastava wrote in a report. Serious loan delinquencies are those 60 days or more past due and include properties in foreclosure or already foreclosed upon.

    “It is shocking what you see,” said Kyle Bass of Hayman Advisors L.P., a Dallas hedge fund that bet the U.S. housing market would fall. It reported a 400 percent return on those investments.

    “Anything securitized in 2007 has got to have the worst collateral performance of any trust I’ve seen in my life,” Bass said.

    Bloomberg Link

  8. Brit commented on Oct 5

    The doom and gloom is a bit much on this site. It must suck being a bear for so many years while the bulls are celebrating all time highs.

  9. Unsympathetic commented on Oct 5

    ” The market has now priced it fully in ”

    And yet, if Tier Capital rules were reinstated, 7 trading desks instantly become insolvent and trillions of derivatives dollars vanish because margin calls cannot be met. Yep, those markets sure are efficient! Keep telling yourself that while ignoring the ABCP market.

    The consumer has stamina? Really? Fascinating, then, that the outstanding credit card balance rises the instant no more HELOC’s can be pulled out.

    Jdog: Since everything is completely bullish, please explain precisely how the fact that the FFR cut provides ZERO relief for the consumer ( the long end of the curve rose ) is a good thing. Oh, and the ECB and BoE refused to cut rates with the Fed.

    Love the effort, but CNBC gets old after a while. The lack of a useful back and forth on any of their shows means that their content has been hogswallop for years. It’s amazing, though!

  10. Estragon commented on Oct 5

    As long as we’re kicking the ball around on ratio charts, how about this one showing the ratio of the S&P500 to nominal GDP going back to 1950.

    It’s obviously possible for the S&P500 to continue to move higher at a faster rate than nominal GDP (expected to be 4-5% for the next year), but that clearly puts the ratio into the high end of the long term range.

  11. some guy commented on Oct 5


    We first started hearing about the subprime problems in summer of 2006 and the stock market has gone up considerably since then… what exactly is priced in… how do you quantify that… i’ve never really undrstood the “priced in” statement… especially on something like the structured products/subprime/housing mess like this that few financial professionals even fully understand.

  12. Eclectic commented on Oct 5

    Oh, Barringo!… I am so scared. I may not sleep tonight.

  13. Justin commented on Oct 5


    It is still a little early is it not? I want to see how strong the consumer is going to be. It should start kicking in here within three months, if not, you win. Did MEW have anything to do with consumer strength in 2003, 2004,2005, and 2006…we shall see. Is the latest “job creation,” enough to carry us going forward? I am sure you’d agree, every dog has its day.

  14. Woodshedder commented on Oct 5

    Jdog’s point is that the same argument have been put forth here for a long time, years even, and yet, unless you count a 10% correction in the index as the outcome, none of what has been postulated has come to fruition.

    How long do you beat a dead horse?

    Justin, a little early? How many times did I hear that in 05, and 06, and now, 07. Sure, keep predicting a crash, recession, whatever, and eventually it will happen, as that is the natural way of things.

    What makes this site interesting is that some here are obviously traders and armchair economists and some are economists and armchair traders. The traders get upset as they are figuring out how to make a dime from this macroeconomic stuff, while the economists get upset because they say it is not about making a dime.

  15. rob commented on Oct 5

    this doesn’t look like any sort of analysis whatsoever — it just looks like a chart of the S&P — seems pretty useless as an analytical tool

  16. techy2468 commented on Oct 5


    i agree with you that this blog is getting filled with ultra bears who think that the economic world is coming to an end, dollar is going to be trashed etc..

    but at the same time its not a proven fact about the consumers health……the unemployment may be low right now, but it can go high with in a quarter if business cuts down hiring since all data is pointing to a downturn.

    we are still waiting to see how long can the consumer hold (the trillion dollar question)

    i am not brave (or greedy) that i do not want to miss this irrational bull market (last 8 months or so) hence i would prefer to be in cash till i get confirmation that we are really out of the woods.

    here are few things which i know matters:

    1. consumer credit cards outstanding has been on up trend
    2. same with Consumer DSR
    3. its just the beginning or mortgage ARM loans reset to higher rates (i think around $600-$800 bn) which will peak around march 2008.
    4. we are yet to see the actual value of mark to model stuff in banks balancesheets (not to mention, level III accounting)
    as enron, MCIWorldcom etc proved its very easy to huge show profits for 2-3 quarters in the books.
    5. we will see the effect of energy, commodities in the price of of everything which will affect consumers.
    6. Falling house price may wipe out couple of trillions from networth of consumers, waiting to see the effect of that.

    i agree that the job market is still pretty good, consumers are still hitting the shops. But if i am not wrong electronic retailers are already showing signs of falling sales (leading indicator of weaning consumer spending, thing we dont need is where we cutdown first.)

    so till we are sure we will not lose 20-30% in the stock market just because we do not want to miss 4-5% gain.

  17. PeterR commented on Oct 5

    The ratio charted above is still looking pretty healthy IMO.

    “It ain’t over until it’s over.”

    For a longer term view, click on my name below and see the last chart on p. 7.

    When this ratio turns down, that will be because SPX turns down and/or the bond yield turns up (yields turn down) relative to each other.

    This has not happened yet, BUT, the following yield curve — 2-year yield vs. 10-year yield — is declining rapidly, suggesting IMO that things are about to deteriorate quickly. [see chart above the previous one on p. 7]



  18. PeterR commented on Oct 5

    PS — Correction, the ratio will turn down when SPX turns down and/or bond PRICES turn up (yields down).

  19. PeterR commented on Oct 5

    PS2 — Ratio NegDiv to SPX.

  20. Barry Ritholtz commented on Oct 5

    A quick reminder how to get unpublished and/or banned:

    • Don’t reveal your real email address to me. This way, if I have a question or warning for you, I cannot reach you.

    • Go all ad hominem on other posters

    • Posting naked self-promotional — and worthless — comments, just for the link back to your new blog

    • Mention specific data, but fail to source or link it

    • Especially do that about your host — misquote me, or state something without backing it up. There s a Google search box in the upped right; Feel free to do some homework.

    • If you are posting 10-20 comments a day, well, then, its time to think about getting your own blog.

    There are too many positive contributors around here, and if you make it difficult to reach you, well, the easiest thing to do is temporarily ban you.

  21. Ivan Kitov commented on Oct 6

    Very interesting.
    This curve repeats one-to-one (if multiplied by -1) the difference between core CPI and CPI (indices)- Figure 5 in

    Could you please provide the extension (or link to data set) of this stock/bond ratio curve before 1998?
    If there is a link between the ratio and the difference, then according to the evolution of the difference in the past, the stock/bond ratio should be decreasing from its highest level since 1980 to 1998-1999.

  22. david foster commented on Oct 6

    Barry, could you explain how the chart is calculated–specifically, exactly what the denominator represents? Thanks.

  23. Groty commented on Oct 6

    I must be dense, but I don’t understand how anyone can get meaning from the graph without knowing the interest rate used to calculate bond prices in the denominator.

  24. Groty commented on Oct 6

    As I hit the button to send my comment, it occured to me the graph would make more sense if the T-Bond were a 0% coupon. I’m guessing that is what is being plotted.

  25. Dentists commented on Oct 8

    South Dakota Dentists

  26. mrnine commented on Apr 18

    Kinda funny coming back around to check out Jdog33’s initial reply, a mere week prior to the market topping and starting it’s descent. Guess it wasn’t (and still probably isn’t) priced in afterall.

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