Chart of the week

With inflation, stock-bond correlation jumps

As prices spike, this week’s chart looks at rising inflation’s impact on the correlation between stocks and bonds.

June 17, 2022 | 2 minute read

Correlation of stock/bond performance vs. inflation

Source: Bureau of Economic Analysis, Bloomberg Finance, L.P. and FS Investments, as of April 30, 2022. 

  • Equity and fixed income markets both fell this week, driven by a notable jump in rates across the yield curve as the Fed hiked rates 75 bps. Fed Chair Powell’s accompanying commentary also prepared investors for what will most likely be a longer battle with inflation than policymakers may have anticipated just one week ago, before the latest upside inflation surprise.  
  • Year to date, stocks have fallen -22.5% while core fixed income is down -11.5%, marking the worst-ever start to the year (as we approach the midway point) for the traditional 60/40 portfolio.1
  • As the highly correlated decline across both markets has shown, not only does inflation impact stock and bond returns, but also the relationship between the two. In fact, the correlation between stocks and bonds has been positive more than negative over time, as the chart shows.2 Yet, it has jumped when inflation (black line) has been elevated and declined when inflation was largely contained, as was true for much of the past decade.
  • If history is any guide, returns across stocks and bonds may remain highly correlated through the coming quarters as Fed and private economists alike keep their inflation forecasts elevated for the balance of 2022.
  • As inflation continues to target the 60/40 portfolio, investors would be wise in adding alternative and lower-correlated investments that have the potential to generate real returns amid a higher inflationary environment to their portfolios.

  • As of June 15, 2022. Stocks represented by the S&P 500; core fixed income represented by the Bloomberg U.S. Aggregate Index.

  • Bureau of Economic Analysis, Bloomberg Finance, L.P. and FS Investments, as of April 30, 2022.

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.

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