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Chart of the week

Stock-bond correlation could remain elevated in 2023

As inflation moderates to a still-elevated level, this week’s chart looks at stock-bond correlations across different inflation environments.

December 16, 2022 | 2 minute read

Correlation of stocks and bonds during different inflationary environments

Source: Bloomberg Finance, L.P. and FS Investments, for the period from January 1976 through November 30, 2022. Inflation as defined by the Consumer price index, measured on a rolling 4-year basis. Stocks represented by the S&P 500. Bonds represented by the Bloomberg U.S. Aggregate Index.

  • This week brought another dose of good news on the inflation front as Tuesday’s consumer price index (CPI) release saw the second consecutive downside surprise.
  • The details of the report were promising as core goods inflation has been negative each of the past two months while leading indicators point to smaller gains in services inflation in 2023.
  • Wage growth, however, continues to run at levels much higher than what is consistent with a 2% inflation target, and Fed Chair Powell again emphasized the tight labor market in his press conference as a primary concern regarding services prices.
  • Against a backdrop of slowing but still-elevated inflationary pressures, the high correlation between stocks and bonds that doomed the traditional 60/40 portfolio’s diversification benefits in 2022 could remain in place well into the next year
  • The chart highlights the correlation between the S&P 500 and the Bloomberg U.S. Agg across various inflation environments. As it shows, the indexes have been positively correlated 100% of the time since 1976 when inflation ran at 4% or higher as it has throughout 2022.1 When inflation averaged between two and four percent, a range it could moderate to in 2023, correlations were still positive nearly two-thirds of the time.1
  • Investors may be wise to seek alternative sources of income and total return as they could continue to be disappointed by the potential diversification benefits of the traditional 60/40 portfolio given a changed inflation and policy environment.

  • Bloomberg Finance, L.P. and FS Investments, for the period from January 1976 through November 30, 2022. Inflation as defined by the Consumer price index an is measured on a rolling 4-year basis. Stocks represented by the S&P 500. Bonds represented by the Bloomberg U.S. Aggregate Index.

The chart of the week and any accompanying data is for informational purposes only and shall not be considered an investment recommendation or promotion of FS Investments or any FS Investments fund. The chart of the week is subject to change at any time based on market or other conditions, and FS Investments and FS Investment Solutions, LLC disclaim any responsibility to update such market commentary. The chart of the week should not be relied on as investment advice, and because investment decisions for the FS Investments funds are based on numerous factors, may not be relied on as an indication of the investment intent of any FS Investments fund. None of FS Investments, its funds, FS Investment Solutions, LLC or their respective affiliates can be held responsible for any direct or incidental loss incurred as a result of any reliance on the chart of the week or other opinions expressed therein. Any discussion of past performance should not be used as an indicator of future results.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

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