For Now, Bonds Are Still Hedging Stocks

Russ takes a look at whether stocks and bonds will move in sync again and what to do if they will.

When stock volatility first erupted in February, something unusual happened: bonds declined along with stocks. This was a clear break from the pattern of the last several years–the post-crisis environment–a period when stocks and bonds have generally moved in opposite directions, a reliably negative correlation.

However, since the spring, the stock-bond correlation has reverted to form (see Chart 1). But as I discussed last year in, The geekiest (and most important) number nobody is discussing, this is not a foregone conclusion. Stocks and bonds sometimes move together. When that happens, investors find that their most reliable hedge suddenly becomes a liability.


The long view

While investors have become accustomed to stocks and bonds mostly moving in the opposite direction, in the 1980s and 1990s stocks and bonds tended to move together. Between 1980 and 2000 stock-bond correlations were positive, averaging about 0.4 (based on a rolling 60-month calculation). But as some investors will remember, that was a very different time.