The Global Nature of Stock-Bond Correlation: Implications for Portfolio Risk
DM local stock-bond correlations are determined by both local macroeconomic factors and common global macroeconomic factors.
The correlation between stock and bond returns has been reliably and persistently negative for the last two decades across Developed Markets (DM) – matching the US experience (see graph below). During this regime, stocks and bonds have hedged one another, dampening overall portfolio risk for a given level of equity allocation.
Building on earlier work, we now look at stock-bond correlation from a global perspective. We explore DM stock bond correlations, their relationship to each other, and their common macroeconomic drivers, if any.
A global CIO assessing the risk of a shift from negative to positive stock-bond correlation must consider both local and US economic developments. Historical evidence suggests that policy rate uncertainty, fiscal sustainability concerns, and worries about monetary policy independence are all linked to such a shift, which would likely be widespread across the DM complex.
Positive stock-bond correlation would alter the expected risk-reward characteristics of a balanced multi-asset portfolio. In such an environment, history shows that it is difficult to find a find low-risk assets with equity hedging properties.