By Avantika Chilkoti and Pat Minczeski 

Bonds, stocks and currencies are moving in tandem more often, as central-bank surprises and trade uncertainty assert their grip over markets.

Known by investors as "risk-on, risk-off," the phenomenon happens when markets essentially split into two broad buckets that move together: risk-off, or haven assets, which rally when investors grow skittish; and risk-on, or growth assets, which rally when risk appetite returns.

A basket of assets that reflect either risk-on or risk-off sentiment has moved together nearly a quarter of the past 100 days through June 19, the highest level since mid-2016, according to a Wall Street Journal analysis.

Two key assets, the S&P 500 and the euro's value against the U.S. dollar, tend to rise when investors are optimistic. Two others, the yield on 10-year Treasurys and the dollar's value against the Japanese yen, tend to fall when investors grow skittish.

The number of risk-on, risk-off days has stepped up quickly since the beginning of the year as investors focus on the change in strategy from the Federal Reserve and the European Central Bank, the on-and-off trade tensions coming out of Washington, and signals of whether China will move to stimulate its economy.

"A lot of these things feel very binary," said Andrew Harman, senior portfolio manager for multiasset solutions at First State Investments.

Brooks Ritchey, senior managing director and head of portfolio construction at Franklin Templeton's K2 Advisors, labels it a "tweets-on, tweets-off" phenomenon when market moves are guided by what President Trump says about trade and monetary policy on Twitter.

A case in point: May 6 and 7 were both "risk-off" days, with stocks falling along with bond yields after President Trump tweeted the day before that the U.S. would impose fresh tariffs on China. "The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!" he wrote.

A month later on June 4, the S&P 500 shot up 2% and bonds yields rose when comments from Fed Chairman Jerome Powell showed the Fed had ended a debate over whether its next move would be to raise or lower rates, and was focusing on whether and when to cut them.

The risk-on, risk-off way of describing markets came into vogue following the global financial crisis, inspired by traders' lingo that mimicked a line from the film "The Karate Kid." The master compares a karate move to waxing a car, "wax on, wax off."

In contrast to a market where investors buy and sell bonds and stocks based on their individual characteristics, such as the underlying corporate profitability, the pattern of assets moving together grew stronger following the introduction of quantitative easing, the giant central bank bond-buying programs. Investors saw the future as black or white: Either exceptional policies would pull the global economy out of a recession, or they would fail and there would be another leg down in the crisis.

When risk-on, risk-off patterns emerge, Neil Dwane, global strategist at Allianz Global Investors, says he remains focused on stock picks, using risk-off periods as a buying opportunity. And he looks for investments where returns might not be correlated to big market moves, such as infrastructure financing for clean-energy projects.

So far, stock picking hasn't been washed away by the big risk-on, risk-off moves, as happened in the early part of the decade, when stocks tended to move up and down in a block. One-year correlation among stocks in the S&P 500, a measure of how much individual stocks deviate from the index, is around 0.41 compared with above 0.75 in 2013, according to Morgan Stanley and Bloomberg data. Zero signifies no correlation and one signifies perfect correlation.

"Sometimes our business can get quite complex and there can be some very interesting relationships to investigate and exploit," says Gregory Perdon, co-chief investment officer at Arbuthnot Latham, a private bank, referring to the process of picking one stock or bond over another. Lately, he says, "our business is just so basic."

James Athey, senior investment manager at Aberdeen Standard Investments, sees investors rushing into certain assets as policy makers respond to the market mood.

He points to gold, for example, which tends to benefit during times of uncertainty. It was also a big beneficiary of risk-on, risk-off sentiment earlier this decade. It has rallied in recent weeks to over $1400 a troy ounce, its highest level in nearly six years.

Write to Avantika Chilkoti at Avantika.Chilkoti@wsj.com

(END) Dow Jones Newswires

June 24, 2019 05:44 ET (09:44 GMT)

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