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Chart of the week

Stock-bond correlation hits multi-decade high

Stock-bond correlation spiked in 2023 to a 40-year high. This week’s chart looks at how it exacerbates the diversification challenge.

January 5, 2024 | 3 minute read

Rolling three-year correlation between stocks and bonds

Source: Bloomberg Finance, LP, FS Investments. Rolling 36-month correlation between the S&P 500 and Bloomberg U.S. Aggregate Index.

  • Stock and bond markets rallied in Q4 2023 as investors quickly adjusted their expectations from a higher-for-longer rate environment toward a Goldilocks-style soft landing amid cooling inflation data and increasingly dovish comments from Fed officials. In the fourth quarter alone, the S&P 500 rose 11.5% while the Agg climbed 6.8% as Treasury yields plunged.
  • Amid the cross-market rally, the rolling three-year correlation between stocks and bonds spiked, hitting 0.68 as of December 31, 2023.1
  • Said another way, investors relied on core fixed income to act as a ballast against volatile equity markets. But today’s high correlations may call into question bonds’ reliability as a portfolio diversifier.
  • Within this environment, alternative sources of diversification and total return potential may be at a premium as investors seek attractive risk-adjusted returns.

  • Bloomberg Finance, LP, FS Investments. Rolling 36-month correlation between the S&P 500 and Bloomberg U.S. Aggregate Index.

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