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Portfolio Construction

US Stock–Bond Correlation: What Are the Macroeconomic Drivers?USStock–BondCorrelation:WhatAretheMacroeconomicDrivers?

By Junying Shen & Dr. Noah Weisberger — May 6, 2021

20 mins read

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For the last 20y, the correlation between stock and bond returns has been negative, enabling CIOs to increase stock allocations, with bonds acting as a hedge, while still satisfying a given risk budget. However, stock-bond correlation is not immutable. The correlation was persistently positive from the late-1960s until the late-1990s, after having been negative in the 15y before that (Figure 1). A shift to positive stock-bond correlation affects the tradeoff between portfolio expected return and risk, likely altering a CIO’s asset allocation decision. What could lead to such a shift in stock-bond correlation?

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Institutional Advisory & Solutions

The IAS team conducts bespoke, quantitative client research that focuses on asset allocation and portfolio analysis.

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  • By Junying ShenVice President, Institutional Advisory & Solutions, PGIM
  • By Dr. Noah WeisbergerManaging Director, Institutional Advisory & Solutions, PGIM

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