Charted territory: Playbook for a new stock-bond correlation regime

The positive correlation between stocks and bonds has broken a 20-year trend of low-maintenance diversification. We argue this is not a cyclical anomaly but the start of a new regime.

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June 26, 2024 | 10 minute read

The positive correlation between stocks and bonds has broken a 20-year trend of low-maintenance diversification. We argue this is not a cyclical anomaly, but rather the start of a new regime predicated on shifts in the macroeconomic and geopolitical environment. A secular shift in stock-bond correlation would represent a seismic disruption for traditional 60/40 portfolios, increasing volatility and uncertainty. We quantify the potential impacts and offer up potential paths to combating this new risk.

Key takeaways

  • The correlation between stocks and bonds has been strongly positive over the past three years, abruptly ending a two-decade run of negative correlation.
  • History suggests this relationship tends to move in long cycles which are driven by prevailing macroeconomic trends around inflation, government debt, and supply-side dynamics.
  • A shift to positive correlation would make achieving investor goals more challenging by forcing a choice between higher risk and lower expected return. Fortunately, alternatives offer a potential ability to recapture some of that lost diversification.

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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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Andrew Korz, CFA

Executive Director, Investment Research

Lara Rhame

Chief U.S. Economist + Managing Director

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