September 24, 2023

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Intermarket Relationships: Following the Cycle

The broad market is a large and confusing place. It can be overwhelming for the eager investor, particularly one who follows multiple indexes and asset types. That’s why it is useful to observe the relationships of the four primary markets—commodities, bond prices, stocks, and currencies.

These intermarket relationships can help clarify the bigger investment picture, lead to smarter trades, and result in better diversified portfolios. By observing all of them, investors may be better able to assess the potential for shifts in the direction of an individual market.

Key Takeaways

  • The analysis of intermarket relationships examines the correlations between different asset classes.
  • These correlations suggest that what happens in one market could affect other markets.
  • For instance, bond prices can move higher as stock prices move lower, and gold prices can go up when the dollar falls—while other assets tend to move in tandem.
  • For over the past two decades, bond and stock prices have had a negative correlation.
  • Understanding intermarket relationships can give investors added insight and help them make better informed trades.

Interactions of Commodities, Bonds, Stocks, and Currencies

Let’s first take a look at how commodities, bonds, stocks, and currencies interact.

Commodities and Bonds

As commodity prices rise, the costs of goods moves upward. This increasing price action is inflationary, and interest rates also rise to reflect the growing inflation. As interest rates rise, bond prices fall because there is an inverse relationship between interest rates and bond prices.

Stocks and Bonds

The correlation between stock and bond prices has changed over time, with a positive correlation (where their prices move in the same direction) being more persistent in the 20th century. However, beginning in about 1998 and lasting through 2019, the correlation was negative. When bonds performed well, stocks underperformed, and when bonds performed poorly, stocks did well.

This was an advantage for investors because the relationship gave them the opportunity to reduce portfolio risk and restrict losses (as the assets provided a hedge for each other).

Then, with the increase in inflation starting in 2020, the correlation has again turned positive. Stock and bond prices have both dropped as inflation and interest rates have risen. The question is, will this positive correlation continue?

The traditional rationale for a positive correlation stems from the fact that bonds are generally considered less risky investments than stocks. Therefore, as bond interest rates increase, there can be more demand from investors for bonds and less for stocks.

Falling demand for stocks has a negative impact on prices. In addition, as interest rates increase it costs companies more to borrow, which increases costs and lowers profits, putting additional pressure on stock prices (especially if costs outpace revenue).

As borrowing becomes more expensive and the cost of doing business rises due to inflation, it is reasonable to assume that companies (stocks) will not do as well.

There can be a lag between falling bond prices and a corresponding stock market decline.

Currencies and Commodities

Currency has an impact on all markets, but the main one is commodity prices. Commodity prices also affect bonds and stocks, while the U.S. dollar and commodity prices generally trend in opposite directions. As the dollar declines relative to other currencies, the reaction can be seen in commodity prices (which are based on U.S. dollars).

The table below shows the basic relationships of the currency, commodities, bond, and stock markets. The table moves from left to right, and the starting point can be anywhere in the row. The result of that move will be reflected in the market action to the right.

Currency: Ý Commodities: ß Bond Prices: Ý Stocks: Ý
Currency: ß Commodities: Ý Bond Prices: ß Stocks: ß

Intermarket Trading Across Asset Classes

Intermarket analysis is not a tool that will give you specific buy or sell signals. However, it can provide a confirmation of trends and can warn of potential reversals.

Typically, as commodity prices escalate in an inflationary environment, it’s only a matter of time before a dampening effect reaches the economy. If commodity prices are rising, bonds should start to fall while stocks are still charging forward. These relationships will eventually overcome the bullishness in stocks, which will be forced to retreat at a certain point.

As mentioned, the combination of rising commodity prices and falling bond prices is not a sell signal for investors in the stock market. But the movements can serve as a warning that a reversal is probable if bonds continue to trend downward (and their yields move up).

As there is no clear-cut signal to sell stocks, there can still be excellent profits from a bull market during this time.

What investors should watch for is stocks taking out major support levels or breaking below a moving average (MA) after bond prices have already started to fall. This would be a confirmation that an intermarket relationship is taking over and stocks are reversing.

There can be response lags between one market’s movement and another market’s reaction to that. During a lag, other factors could come into play to affect an intermarket relationship.

When Does Intermarket Analysis Break Down?

There are times when current, established relationships between commodities, bonds, stocks, and currencies change.

Stocks and Bonds

For instance, during the Asian collapse of 1997, the U.S. markets saw stocks and bonds decouple. A negative correlation ensued and lasted until 2019.

Why did this occur? The typical market relationships assume an inflationary economic environment. So, when we move into a deflationary or low rate environment, certain relationships may shift.

Deflation is generally going to push stock prices down, as poor growth potential in stocks can translate to a decrease in value. Bond prices, on the other hand, will likely move higher to reflect falling interest rates (recall that interest rates and bond prices move in opposite directions). Therefore, it’s important to be aware of inflationary and deflationary environments in order to be ready for a possible change in the correlation between bonds and stocks.

There may be times when, despite the economic environment, one market may not seem to move at all. However, that doesn’t necessarily mean that other rules won’t apply. For example, stalled commodity prices along with a falling U.S. dollar probably represent a bearish indicator for bond and stock prices.

A relationship may continue to hold, even if one market is not moving, because there are always multiple factors at work in the economy.

The chart below provides an idea of the various factors that at different times may support a positive or negative correlation between stocks and bonds.

Positive Correlation  Negative Correlation
High, unstable yields Low, stable yields
High, unstable inflation Low, stable inflation
High inflation, weak growth Changing appetites for risk, stocks vs. bonds
Negative earnings growth/interest rates correlation Positive earnings growth/interest rates correlation
Positive correlation of risk premiums for stocks and bonds Negative correlation of risk premiums for stocks and bonds
Monetary policy raises rates in weak economic periods Monetary policy raises rates in strong economic periods
Flexible approach to monetary policy Established rules for monetary policy
For illustrative purposes only. Source: Schroders.


It’s also important to take global factors into account. As companies become increasingly global, they play large roles in the direction of the U.S. markets. For instance, the stock market and currencies may take on an inverse relationship as companies continue to expand.

This is because as companies conduct more business overseas, the value of the money brought back to the U.S. grows as the dollar falls, which increases earnings. To effectively apply intermarket analysis, it is always important to understand the shifting dynamics of global economies.

What Is Intermarket Analysis?

It’s considered an area of technical analysis that studies how the movement of prices of stocks, bonds, commodities, and currencies relate to each other.

How Does Inflation Affect the Relationship of Stocks and Bonds?

Generally, when inflation is high and volatile, stocks and bonds have a positive correlation. That is, their prices move in the same direction (downward). When inflation is low and stable, stocks and bonds tend to have a negative correlation. Investors should always bear in mind that other factors could affect an expected or established correlation.

Why Do Intermarket Relationships Matter?

They matter because once investors understand how the assets that interest them correlate, they can be prepared to take action. For example, if they believe something has happened that can affect the current correlation between stocks and bonds, they may see an opportunity to buy (or sell) stocks (or bonds).

The Bottom Line

Intermarket relationships can present valuable investment opportunities when investors understand them. However, investors must be aware of the long-term economic environment and adjust their analysis of intermarket relationships accordingly.

Intermarket analysis should be just one of many tools investors use to judge the direction of certain markets or whether a trend is likely to continue over time.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal.