The Stock/Bond Correlation

AQR

Research

18 Pages

AQR Capital Management explains why the stock and bond correlation may turn positive again and why that matters. They argue inflation uncertainty, not simply high inflation, is the swing factor, echoing the 1970s through 1990s experience. If correlation moves from minus 0.5 to plus 0.5, a 60 40 portfolio could see risk rise about 20%.

Date published: May 2022

 

Key Takeaways

Inflation uncertainty: Higher inflation volatility can make stocks and bonds fall together more often.
Diversification erosion: Positive correlation weakens bonds as ballast, raising portfolio risk without changing holdings.
Third diversifier: Market neutral, trend, and commodities may help when bonds stop offsetting equity drawdowns.
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