Question: How Do Bonds Interact with the Stock Market?
Answer: It is a general rule of thumb that bonds and stocks move in the opposite directions. In other words, when stocks go up in value, bonds go down. This is because stocks generally do well when the economy is booming -- consumers are buying, companies are making more earnings, and investors have more to invest.
Conversely, when the economy starts to decline, companies’ earnings will drop, and stock prices will plummet -- this is when investors want the safe interest payments guaranteed by bonds.
However, sometimes both stocks and bonds go up in value at the same time. This is usually because there is too much money, or liquidity, chasing too few investments, as is the case at the top of a market. It could also be the case when some investors are optimistic about the economy’s future, and buying stocks, while others are pessimistic and buying bonds.
Bonds FAQ
- What Are Bonds?
- What Types of Bonds Are There?
- How Do Bonds Interact With the Stock Market?
- How Do Bonds Interact With the U.S. Economy?
- How Do Bonds Affect Mortgage Interest Rates?
