MarketMinder: "Of Dogs and Decoupling" - Finance

Of Dogs and Decoupling

No single factor explains broad market trends-ever.

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Story Highlights:

>Headlines often reduce complicated market drivers to one-to-one relationships.>There are always numerous plausible explanations for investor actions-none alone can predict the market or economy's path. >So while it's important to watch these trends-even guess why they're happening-rarely should they heavily influence investments.

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It's tempting to distill broad market drivers into one or two easily digested factors, especially for the sake of an article or headline-or even our own sanity. For example: Rising US bond yields must mean investors expect a relatively stronger US economic recovery (here-great news!) or the weakening dollar surely shows expectations of a relatively weaker US recovery (here-watch out!). So which is it? Hard to say. Markets aren't so easily reduced.

Investors have been puzzling over-and debating-both these trends lately. After moving together during the crisis and nascent recovery, US Treasury and German long-term government bond yields (two of the safest global investments) are parting ways-widely known as decoupling. In fact, Treasury yields at the end of 2009 and into 2010 rose faster than virtually any other developed country's government bond yields. And just as noticeably, the dollar continues to weaken against other major developed currencies.

But contrary to headlines, no single cause likely underpins either trend. (And the US recovery can't be both relatively stronger and weaker at the same time, based on two battling indicators of dubious reliability.) Any number of investor expectations could plausibly explain rising Treasuries or a falling dollar. To name a few: Inflation expectations, interest rate expectations, risk aversion, economic forecasts, the interplay of all these, and many more. It's not impossible some wild investor just bought a German Shepherd puppy and that cute mug convinced him German bonds were it. Fact is, there are likely different investors using all these to inform their decisions simultaneously. The end result is an aggregate of nutty hypotheses, perfectly sensible beliefs, contradictory theories, even that one puppy-crazed investment-and that aggregate is wiser than all the inputs combined.

But careful! None alone predicts the market or economy's path. While it's important to watch these trends-even guess why they're happening-rarely should an investment decision hinge on a guessed-at, one-to-one relationship. Leave that for the press.

*The content contained in this article represents only the opinions and viewpoints of the MarketMinder editorial staff.

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