What Shifting Stock-Bond Correlations Mean for Your Money
The negative relationship of the past quarter century allowed investors to hedge equity risk effectively. That may now be changing.
A recent paper analyzing the correlation between stock and bond returns going back to 1875 suggests the relationship of the past quarter century is shifting in an uncertain inflationary environment. The results might stimulate some investors to rethink their portfolio allocations.
Researchers at the State of Wisconsin Investment Board and fund manager Robeco take a new look at one of the fundamental drivers of long-term investment risk/return ratios — how much equity and bond prices move together – in “Empirical evidence on the stock-bond correlation,”. The paper adds value to this well-studied area by taking the analysis back nearly a century and a half, and studying the UK, Germany, France and Japan in addition to the US.
Let’s start with the classic “stocks for the long run” argument, which asserts that equity markets will drive the lion’s share of portfolio growth over periods of 10 years or more and will very likely outperform bonds and other asset classes. Investors who accept it take most of their long-term risk in stocks.