Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Vantage Point Series
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
    • Investing in Alternatives
    • Risk Management
    • ESG Investing
    • Opportunities in EM
  • Alternatives

    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)

    Equity & Fixed Income

    • PGIM Fixed Income
    • Jennison Associates

    Solutions

    • PGIM DC Solutions
    • PGIM Multi-Asset Solutions
    • PGIM Quantitative Solutions

    Intermediary Distribution

    • PGIM Investments
    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Our Businesses
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
Correlation
Strategic Portfolio Construction

Negative Correlation Is Dead! Long Live The 60/40 Portfolio!NegativeCorrelationIsDead!LongLiveThe60/40Portfolio!

By Dr. Noah Weisberger & Dr. Xiang Xu — Nov 12, 2022

3 mins

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
Download PDF

Share

The venerable 60/40 stock-bond portfolio has had a historically bad run thus far in 2022. The sharp year-to-date decline in stock and bond prices has pushed measures of correlation to 50y highs and well into positive territory for the first time in more than 20 years.1 This has prompted some to proclaim the demise of the 60/40 portfolio.

We disagree. Despite the challenges of a positive correlation environment, investors ought not learn the wrong lesson. Even in a positive stock-bond correlation world, diversified portfolios still have a critical role to play. 

True, when correlation is positive, the loss of bonds as an implicit hedge for stocks leads to increased portfolio volatility and worse tail outcomes. But don’t forget Finance 101! The virtues of diversification remain intact even if assets are positively correlated, so long as they are not perfectlycorrelated (i.e., a correlation of +1). 

Judging by the 1965-2000 period when US stock-bond correlation was last persistently positive, typical correlation readings are in the +0.25 range – a far cry from +1 and far more moderate than current correlation levels – leaving plenty of room for diversification benefits.  In fact, the 60/40 portfolio delivered higher ex-post excess returns during the positive correlation regime of 1965-2000 than it did during the negative correlation regime of the last 20 years.

One other noteworthy historical market feature is that even during periods of positive correlation, the hedging properties of bonds came to the rescue just when they were needed most. Think about 1987 and 1998, both well ensconced within the long 1965-2000 positive correlation regime. Yet in both instances, when stock declines were deepest, bonds rallied and helped to hedge stock losses.

How should investors respond to positive correlation? To be sure, ex-ante portfolio performance will deteriorate, reflecting the riskier environment.  Even so, a balanced portfolio remains optimal. For many investor types (e.g., a mean-variance optimizer) the optimal allocation when correlation is positive is not that dissimilar to when correlation is negative. As such, being wrong about future correlation is not much worse than being right. With no urgency in making a call about future correlation, a slow, steady, and even skeptical approach seems warranted. Assuming stock-bond correlation of zero may be the best multi-purpose strategy until correlation uncertainty resolves.

In a regime where the diversification properties of bonds are, admittedly, diluted, a popular remedy is to add additional assets to the portfolio mix.  If included in small amounts (<10ppt), assets like commodities, energy, or precious metals push out the efficient investment frontier ever so slightly.  However, improvements are modest at best because commodities offer returns that are equity-like but at significantly higher volatility. Private assets may be more promising on this score, offering equity-like returns with significantly lower reported volatility and less liquidity risk than is commonly thought.2

Even if changes in the macroeconomic landscape (unsustainable fiscal policy and less independent, less rules-based monetary policy are top-of-mind concerns) lead to persistently positive stock-bond correlation, the benefits of a balanced portfolio of stocks and bonds will endure. Negative correlation may be dead, but long live balanced portfolios! 

Download PDF
Learn More
Portfolio Research

The Portfolio Research team conducts proprietary research, helping investors navigate asset allocation, portfolio construction, and evolving market landscapes.

Learn More

Full research

Portfolio Implications of a Positive Stock-Bond

While simultaneous large declines in stock and bond prices are likely temporary, a positive stock-bond correlation regime may persist.

Learn more
  • By Dr. Noah WeisbergerManaging Director, Institutional Advisory & Solutions, PGIM
  • By Dr. Xiang XuVice President, PGIM Multi-Asset Solutions

You may also like

Using Cape to Estimate Future Stock Returns
Strategic Portfolio Construction

Using Cape to Estimate Future Stock Returns

Jan 15, 2025

In comparing CAPE model specifications (1/CAPE – 10y US Treasury real yield) has been the best way to incorporate CAPE in estimating future 10y stock returns.

The Scale Effect: How Size Shapes Investment Governance and Allocation
Strategic Portfolio Construction

The Scale Effect: How Size Shapes Investment Governance and Allocation

Dec 2, 2024

PMA examines how greater scale both enables and pushes investors to allocate differently, with implications for governance as well as investment outcomes.

Styles of Responsible Investing: Attributes and performance of different RI fund varieties
Strategic Portfolio Construction

Styles of Responsible Investing: Attributes and performance of different RI fund varieties

Jun 28, 2024

How responsible investing funds differ in their portfolio construction approaches, revealing divergent green transition approaches and performance outcomes.

  1. We define US stocks as the S&P 500 Total Return Index and US bonds as the 10y US Treasury Note Constant Maturity Total Return Index. Correlation of 1m returns is calculated on a trailing 12m basis. Source: Haver Analytics, Standard and Poor’s, US Treasury and PGIM IAS.
  2. Harnessing The Potential of Private Assets: A Framework for Institutional Portfolio Construction, (PGIM IAS, June 2021).
  • Insights

    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
  • Investment Themes

    • ESG Investing
    • Investing in Alternatives
    • Investing in Emerging Markets
    • Risk Management
  • Our Businesses

    • PGIM DC Solutions
    • PGIM Fixed Income
    • PGIM Investments
    • PGIM Multi-Asset Solutions
    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)
    • PGIM Quantitative Solutions
    • Jennison Associates
  • Clients

    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
  • About

    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
  • Careers

    • Careers at PGIM
    • Job Opportunities
  • Newsroom

    • All News
    • Press Releases
    • In The News
    • Facts & Figures
    • Media Contacts
PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Netherlands Regulatory Disclosures
  • Canadian Regulatory Disclosures
  • Ireland Gender Pay Gap Report
  • Cookie Preference Center

For Professional Investors only.* All investments involve risk, including the possible loss of capital.

This material is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM is the principal asset management business of Prudential Financial, Inc. and a trading name of PGIM, Inc. and its global subsidiaries. PGIM, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply a certain level of skill or training.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

In the United Kingdom, this website may be issued by PGIM Private Alternatives (UK) Limited or PGIM Private Capital Limited.  In the European Economic Area (“EEA”), this website may be issued by PGIM Private Capital (Ireland) Limited or PGIM Luxembourg S.A. or PGIM Real Estate Germany AG.

PGIM, Inc. has its headquarters at 655 Broad Street, Newark, NJ 07102. PGIM Private Capital (Ireland) Limited has its registered office at IDA Business Park, Letterkenny, Co. Donegal, F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. PGIM Limited and PGIM Private Alternatives (UK) Limited have their registered offices at Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number: 193418). PGIM Private Alternatives (UK) Limited is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 181389). PGIM Private Capital Limited has its registered address at 1 London Bridge, London SE1 9BG and is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 172071). PGIM Luxembourg S.A., Netherlands Branch is registered with the Netherlands Chamber of Commerce under number 85998877 and has its local offices at Gustav Mahlerlaan 1212, 1088LA Amsterdam, The Netherlands. PGIM Luxembourg S.A. has its registered address at 2 Boulevard de la Foire, L-1528 Luxembourg and is authorised and regulated by the Commission de Surveillance du Secteur Financier (“CSSF”) in Luxembourg (registration number A00001218). PGIM Real Estate Germany AG has its registered address at Wittelsbacher Platz 1, 80333 Munchen, Germany and is authorised and regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) in Germany (registration number 10138142).

In Japan, information is provided by PGIM Japan Co., Ltd. (“PGIM Japan”) and/or PGIM Real Estate (Japan) Ltd. (“PGIMREJ”).  PGIM Japan, a registered Financial Instruments Business Operator with the Financial Services Agency of Japan offers various investment management services in Japan.  PGIMREJ is a Japanese real estate asset manager that is registered with the Kanto Local Finance Bureau of Japan.

In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a regulated entity with the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser. This material is issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act 2001 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Section 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.   

Prudential Financial, Inc. (“PFI”) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

*PGIM.com/Podcasts and its content is intended for informational or educational purposes only and is not directed exclusively to Professional Investors. 

PGIM Logo
PGIM Logo

You are viewing this page in preview mode.

Edit Page