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May 1, 2018 |
Stock-Bond Correlations

The first quarter of 2018 was tough for investors. After a relatively calm 2017, where it seemed like the momentum of investment returns could not be stopped, volatility made a comeback causing most major indices to finish negative for the quarter. Both the S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index (Agg) finished the first quarter of 2018 with negative total returns, in part due to rising interest rates, inflation scares, and tariff talks.

While volatility can create an uncomfortable environment, what’s worse is when investors feel like they have nowhere to “hide” and both stocks and bonds decline in value. Looking back over the past 30 years, it is actually a rare occurrence for both the S&P 500 and Agg to have negative returns in the same quarter in part because stocks and bonds have experienced low to negative correlation, at least this has been the case recently. In fact, Q1 2018 was the first time since the third quarter of 2008 where both indices had negative total returns in the same quarter. In the past 30 years this has only happened eight times!

In response to the markets’ recent behavior we took a deeper dive into the data to review how these two asset classes have behaved in relation to one another historically by comparing the monthly returns of the S&P 500 to the Agg. Our concern was that the diversification benefits of stocks and bonds might have diminished, leading us to question whether bonds will be a reliable hedge for equities over the next few years as the Fed continues down the path to normalize monetary policy. Historically as investors have become fearful and sold equities they have flocked to bonds as a safe haven. With a muted return outlook and continued rising rates on the horizon this may not be the case over the next few years.