S&P 500 and inflation expectations

I want to further expand on my discussion and analysis of the U.S. equity markets and their increased correlation with light sweet crude. One of the reasons I gave for the increase in the positive correlation was monetary stimulus and inflation expectations. This discussion can be found here. Well, I took the analysis one step further and I compared the S&P 500 versus inflation expectations, the later defined as the spread of 10-year treasuries and 10-year Treasury Inflation Protected Securities. Here are three charts that I found enlightening. The rolling 1-year correlation of the 13-week percentage change in the S&P 500 and the change in inflation expectations. The rolling 3-month correlation of the 13-week percentage change in the S&P 500 and the change in inflation expectations. Finally, the 13-week performance of the S&P 500 and inflation expectations.

What I think is interesting about these charts is that the prior to the bear market of 2008, the rolling 3-month correlation was erratic while the rolling 1-year correlation was predominantly negative. This can also be seen in the performance of the S&P 500 versus the inflation expectations (the bottom chart). Prior to 2008, peaks in equity market performance appeared to coincide with troughs in inflation expectations and vice versus.

Since 2008 however, the correlation has increased. Both the 3-month and 1-year correlation of the S&P 500 and inflation expectations has been upward sloping. This relationship is also seen in the performance of the S&P 500 and inflation expectations, as both measures began to move, more or less, in tandem following the 2008 bear market.