How the Economy Affects Major Asset Classes

Asset performance patterns are not always easy to explain, even over longer time frames. For instance, stock and bond prices are positively correlated, but they are also negatively correlated at various times. Asset prices also move differently in periods of uncertainty than in quieter times.

The importance of the economy’s influence on asset prices is universally recognized, yet forecasts of asset returns from economic data are not reliable, largely because market prices can change much more quickly than economic statistics. Still, economic shifts are highly relevant in explaining, if not predicting, asset-price

There are some strong basic connections between asset performance and two obvious and quantifiable measures of the economy’s behavior: its growth rate (real Gross Domestic Product) and its inflation rate. In a previous publication, we classified assets by the direction of their relationships with various measures of growth and inflation. Here we reduce the structure of the interrelationships to a simple scheme based directly on empirical evidence.

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