Introduction
The correlation between stock and bond returns is a key input for portfolio construction, risk management, and asset allocation. Traditionally, investors have viewed bonds as a safe-haven asset that provides diversification benefits when combined with stocks. However, the riskiness of bonds and stock-bond correlations vary significantly over time. After remaining negative throughout the 2000s, stock-bond correlations have sharply reversed in recent years, surging into positive territory and reaching levels last seen in the mid-1990s.
In this article, I discuss the historical behavior of stock-bond correlations, the economic forces that drive these relationships, and the practical implications for investors.
Table of Contents
Historical Trends in Stock-Bond Correlations
Long-Term Trends
Crisis Periods
Economic Drivers of Stock-Bond Correlations
Implications for Investors
References