RT Journal Article
SR Electronic
T1 A Changing Stock–Bond Correlation: Drivers and Implications
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 64
OP 80
DO 10.3905/jpm.2023.1.459
VO 49
IS 4
A1 Alfie Brixton
A1 Jordan Brooks
A1 Pete Hecht
A1 Antti Ilmanen
A1 Thomas Maloney
A1 Nicholas McQuinn
YR 2023
UL https://pm-research.com/content/49/4/64.abstract
AB The relationship between stock and bond returns is a fundamental determinant of risk in traditional portfolios. For the first two decades of the 21st century, the stock–bond correlation was consistently negative and investors were largely able to rely on their bond investments for protection when equities sold off. But this was not the case in the previous century, and macroeconomic changes—such as higher inflation uncertainty—could lead to a reappearance of the positive stock–bond correlation of the 1970s, 80s, and 90s. This would have broad implications for investors, either increasing portfolio risk or forcing allocation changes likely to reduce expected returns. This article analyzes the implications for investors of a change in this “golden parameter” and presents a simple macroeconomic model to help understand its drivers, supported by international empirical evidence. Finally, it explores the role of alternatives in making up the potential diversification deficit in a positive stock–bond correlation world.