SDG - A Marriage Of Inconvenience? The Remarkable Harmony Between Stocks And Bonds

2023-04-10 04:59:00 ET

Summary

• The historically low correlation between equity and government bond returns is a cornerstone of modern investment strategy and the traditional 60%/40% model portfolio, based on the theory this split provides diversification benefits that can improve risk-adjusted returns over time.
• There have been two significant (albeit brief) negative turns in the stock-bond correlation of returns over the past decade, both following macroeconomic or deflationary shocks and bursts of extreme risk aversion.
• The 2022-2023 positive spike in the stock-bond correlation raises the significance of whether the recent bout of higher inflation will ultimately prove short-lived or herald a longer-lasting regime shift.

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