Positive Stock-Bond Correlation: Prospects & Portfolio Construction Implications
US stock-bond correlation has shifted from negative to positive, a change that has also occurred across the developed market.
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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US stock-bond correlation has shifted from negative to positive, a change that has also occurred across the developed market.
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