The Goldilocks Paradigm

NEW YORK ( TheStreet) -- "This world is clearly emerging before our eyes. The shifts ahead, the opportunities ahead are massive." - Carly Fiorina

The correlation between stocks and commodities continues to move lower into negative territory. As U.S. equities are hitting new all-time highs, commodity prices are at their lowest levels of the year. Taking a look at the DB Commodities Tracking Index Fund ( DBC) makes this very clear year to date. This is a dramatic shift from the prevailing relationship and deflationary environment that existed from late 2008 through the end of 2012.

In a deflationary environment, equities tend to be positively correlated with commodity prices and negatively correlated with bonds. As such, rising commodity prices and interest rates are generally viewed as bullish for equities while lower commodity prices are generally viewed as bearish for equities. Beginning in February, this relationship started to breakdown, as commodity prices and interest rates moved lower while stock prices continued to march higher.

The fear of deflation was subsiding but we weren't necessarily moving back to a more normal, inflationary environment in which stocks and bonds tend to move together. We were somewhere in the middle, in what some might call a "Goldilocks" economy. Neither "too hot" nor "too cold," with moderate economic growth and low inflation. Before 2013, the mid-to-late 1990's were shining example of this type of economy and naturally, stocks flourished during these years.

Also important to the Goldilocks thesis is that it creates an environment that allows for an extended period of easy monetary policy. This is what we are seeing today as the Federal Reserve continues operate with loosest monetary policy in history more than four years into the economic expansion.

What does this all mean for today's markets? First, as long as Goldilocks is the accepted thesis, investors are likely to continue pouring money into U.S. stocks as there is no immediate threat of inflation, deflation or tightening of monetary policy. Second, the traditional relationships between stocks, bonds and commodities are likely to continue to confuse investors as they deviate from the inflationary and deflationary environments of the past.

For U.S. equity investors, they should enjoy this unusual environment while it lasts but not become complacent. All good things come to an end and the current Goldilocks economy is no exception to this rule. At some point in the near future, the economy will either become too hot or too cold and the three bears will return home with a vengeance.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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