Thinking About Thinking

Which Is More Important – The Stock Market or The Bond Market?

Posted in Economy, Philosophy by larrycheng on August 11, 2010

This topic was raised to me today in a meeting, and after thinking about it, doing some research, and trying to put aside my biased interest in stocks – I think a stronger case can be made that the bond market is more important than the stock market.  There are a number of reasons for this, most notably starting with size.

The global bond market is about $82 trillion.  The global stock market hovers around $40–$50 trillion.  So, on pure size alone, the bond market is almost twice the size of the stock market.  That’s a substantial difference.  Point – bond market.

The bond market has a broader set of issuers as you have different segments: corporate, government & agency, municipal, mortgage backed, and funding.  Whereas the stock market is a construct for a limited set of corporations – for example, the US has 17,000 public companies.  Point – bond market.

The stock market is arguably more influential on sentiment.  What’s the key indicator of the stock market?  My guess is most would say S&P 500 or Dow.  What’s the key indicator of the bond market?  Probably most don’t know (e.g. indexes like Merrill Lynch Domestic Master).  That, in and of itself, gives the stock market a broader reach and voice.  Point – stock market.

That being said, and this may be a reach, but I think the bond market is more influential on the stock market than the other way around.  The primary reason is that the returns on bonds are more predictable due to the fixed yields.  If yields are very high, there’s no reason to invest in stocks.  The comparative risk-reward isn’t there.  But, if yields are low, that’s an incentive to move into risk assets like stocks.  It doesn’t work as seamlessly the other way around because returns on stocks are less predictable and more volatile.  Point – bond market. 

This is hardly a scientific analysis, but based on just off the cuff research, what’s more important – the stock market or bond market?  I’d probably have to go with the bond market.   

9 Responses

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  1. […] Which Is More Important – The Stock Market or The Bond Market … […]

  2. beyondanomie said, on August 12, 2010 at 7:04 pm

    Randomly came across this article.

    Both the bond and stock market are heavily intertwined, as major asset holders tend to have significant positions across both, and will shift funds between the two as needed.

    But because the bond market is more predictable/stable than the stock market, it will never have the glamour of stocks nor their popular clout amongst the general public. However, in terms of permitting the raising of money (the basic core function of both bonds and stocks) the bond market is more influential simply because its stability attracts more institutional cash on average.

  3. JPY Forex fan said, on October 11, 2010 at 2:52 pm

    Hi Larry, I also randomly came to this article. When compared to the currency market’s daily $4-trillion turnover, both the stock market and the bond market are pretty much dwarfed by it 😉

  4. Shahid said, on July 2, 2011 at 11:51 pm

    how can you compare currency market to capital market..its like comparing apple to oranges.

    • larrycheng said, on July 24, 2011 at 9:33 am

      Shahid, what’s wrong with comparing apples to oranges as long as you know you’re comparing two different types of fruit? If we were only allowed to compare different kinds of apples to each other, that wouldn’t be as interesting don’t you think?

  5. Bodwiser said, on November 15, 2012 at 5:18 am

    Larrycheng, yes the currency market may be bigger than capital and stock market but to come to think of it ….SO WHAT ?? This piece of info. is irrelevant to this discussion.

  6. JC Smith said, on December 21, 2012 at 11:36 am

    The “investment market” is composed of many different investments: bonds, stocks, “cash”, real estate, currency markets, precious metals, etc. If someone has investments in the currency markets, then that is taking away from potential investments in bonds, stocks, or some other investment device. My point is this: The currency markets are appropriate in this conversation. It’s all about where the money is FLOWING TO, or FLOWING OUT OF.

  7. said, on September 14, 2013 at 2:42 pm

    A men’s watch has significantly evolved and become just as pricey as women’s jewelry.

    Some people may suggest that by wearing jewelleryy can cause a person to look annd also goood feeling.

    There is even convernience with some online stores to select how your accessory
    will look on you, before you commit to buy it.

  8. Mary said, on September 29, 2013 at 6:00 pm

    There really is no correct answer as to which market is better for companies to invest in. It doesn’t matter because arbitrage will equalize the price.

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