Chart of the week

Stock-bond correlation is quickly rising

Stock-bond correlation has been on the rise again. This week’s chart looks at the trend and how it has exacerbated the diversification challenge.

August 18, 2023 | 2 minute read

S&P 500/Bloomberg Agg rolling 40-day correlation

Source: Bloomberg Finance, L.P., as of Aug. 11, 2023. Bloomberg Agg refers to the Bloomberg U.S. Aggregate Index.

  • The correlation between stocks and bonds fell rapidly through the first half of the year over hopes for a soft landing and growing sentiment the Fed’s tightening cycle would come to an end. 
  • As the chart shows, however, the 40-day rolling correlation of stocks and bonds has spiked since May and currently resides near its peak of 2022, a period when stocks and bonds declined in unison.
  • The sharp rise in stock/bond correlation reflects the ongoing challenge in building diversified portfolios. Furthermore, investing in the S&P 500 has increasingly implied a concentrated bet on a small group of stocks.  
  • As the economy and financial markets grapple with the potential for a higher-for-longer interest rate environment, investors will increasingly need to seek investments that can help manage risk and don’t rely on broader market performance to generate returns.

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