Bonds as Diversifiers Aren’t Dead — Just Dormant
Stock-bond correlations are positive again, making many observers question conventional investing wisdom.
Investors have been roiled by declines in stocks and bonds.
Photographer: Michael Nagle/Bloomberg
Stocks and bonds are moving in lockstep once again, triggering more agita about what it all means. Before we get carried away anew with declarations about how “the investing world is forever changing,” it’s worth remembering how fluid the relationship has proved over the past couple of years — and how another twist is always just around the corner.
To review: 10-year Treasury notes were negatively — or minimally — correlated with the S&P 500 Index for most of the 21st century, and the investing public had generally accepted that some mix of stocks and bonds was the optimal way to manage risk. Then last year, correlations surged into meaningfully positive territory (both went down simultaneously), tanking the storied 60/40 portfolio (60% stocks, 40% bonds) and leading many observers to question the conventional wisdom about portfolio construction.