{"id":13080,"date":"2024-04-01T18:02:02","date_gmt":"2024-04-01T18:02:02","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=13080"},"modified":"2024-04-04T12:21:28","modified_gmt":"2024-04-04T12:21:28","slug":"will-2024-mark-the-return-of-a-negative-stock-bond-correlation","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/will-2024-mark-the-return-of-a-negative-stock-bond-correlation\/","title":{"rendered":"Will 2024 Mark the Return Of A Negative Stock-Bond Correlation?"},"content":{"rendered":"\n

Will 2024 Mark the Return of a Negative Stock-Bond Correlation?<\/strong><\/p>\n\n\n\n

As nearly every investor knows, 2022 was a challenging year for equities. Inflation\u2019s upside surprise caused the Federal Reserve to shift quickly from quantitative easing (QE) to quantitative tightening (QT), while aggressively raising the benchmark Fed funds rate from 0.1% to 4.4%.1<\/sup> Stocks were pressured into a bear market, with the S&P 500 shedding -18.1% for the year.2<\/sup><\/p>\n\n\n\n

Normally investors would hope to mitigate some of the downside with a fixed income allocation. But that didn\u2019t happen in 2022.<\/p>\n\n\n\n

Instead, bond yields shot higher, as worse-than-expected inflation and the end of quantitative easing put upward pressure on the 10-year U.S. Treasury bond yield. The result was a big down year for the 10-year (-17.83%), with yields more than doubling from 1.6% to 3.88%. For the first time since 1958-1959, U.S. Treasury bonds (10-year) delivered two consecutive years of negative returns.<\/p>\n\n\n\n

Rarely do we see across-the-board selloffs in fixed income coincide with a major stock market drawdown. This event gave investors a stark reminder: bonds are generally great hedges against growth shocks (recession-led bear markets), but they do not offer much cover during inflation shocks.<\/p>\n\n\n\n

Looking for Long-Term Market Opportunities? Focus on the Fundamentals!<\/a><\/span><\/strong><\/p>\n\n\n\n

In light of market challenges, it becomes crucial for investors to gain a comprehensive understanding of market factors and trends across different investment avenues. To facilitate this understanding and provide insights into the current market landscape, I am pleased to offer our free April 2024 Stock Market Outlook3<\/sup><\/span>.<\/strong><\/a><\/p>\n\n\n\n

This report not only offers a snapshot of the current state of the stock market but also identifies key opportunities, enabling readers to make informed investment decisions in today’s dynamic environment. You\u2019ll gain access to detailed insights, such as:<\/p>\n\n\n\n

\u2022 U.S. macro-outlook- San Francisco Fed \u201cFed views\u201d<\/em>
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\u2022 Zacks Rank S&P500 sector picks
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History reminds us as much.<\/p>\n\n\n\n

If we look back at the late 1960s and 1970s, we can find another environment when stocks and bonds started moving in the same direction and an environment where inflation shocked to the upside. The 1973 oil embargo catalyzed already creeping inflation, and inflation expectations also started to drift higher. Positive correlation between stocks and bonds took hold.<\/p>\n\n\n\n

It wasn\u2019t until the late 1990s when a negative stock-bond correlation resurfaced, which was also the time when inflation expectations fell back down to more normal\/neutral levels (slightly less than 3%). That negative correlation lasted for a little over 20 years, which meant that diversified stock-bond portfolios were largely effective at mitigating volatility and hedging against weak growth.<\/p>\n\n\n\n

The two charts below illustrate how the relationship between inflation expectations and stock\/bond correlation played out. In the first chart, readers can see that inflation expectations were elevated throughout the 1980s but gradually improved as consumers became more firmly convinced that inflation was in a sustained downtrend.<\/p>\n\n\n\n

One- and Five-Year Expected Inflation<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

As inflation expectations become more anchored, the stock\/bond correlation turned negative and stayed that way for over 20 years (chart below). We saw a positive correlation return when inflation and inflation expectations shot higher (2021 \u2013 2022 in the chart above).<\/p>\n\n\n\n

\"\"
Russell Investments5<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

The good news today\u2014and the reason I think a negative stock\/bond correlation could return in 2024\u2014is that inflation expectations have moved sharply lower from peaks, and could continue in a downtrend or at least hover below 3% for the year. But if inflation continues to moderate, history suggests that the stock-bond correlation could flip back to negative, much like we saw in the late 1990s.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

The return of negative stock-bond correlation would strengthen a \u2018balanced\u2019 portfolio\u2019s ability to mitigate equity market volatility and also suggests that bonds would hold their own in a period of weak economic growth. I expect that 2024 will not feature weak growth, but a longer-term perspective looks favorable for a multi-asset, diversified portfolio\u2014assuming such an allocation is appropriate relative to an investor\u2019s goals and needs.<\/p>\n\n\n\n

To help you focus on the fundamentals to strengthen your portfolio, I recommend downloading our free April 2024 Stock Market Outlook Report6<\/sup><\/a><\/span><\/strong>, which gives investors our expert market commentary and the latest forecasts. You\u2019ll receive information on:<\/p>\n\n\n\n

\u2022 Zacks Rank S&P 500 sector picks
\u2022 Current asset allocation guidelines
\u2022 Zacks forecasts for the months ahead
\u2022 Zacks Rank industry tables
\u2022 Buy-side and sell-side consensus at a glance
\u2022 And much more!<\/em><\/p>\n\n\n\n

If you have $500,000 or more to invest and want to learn more about our market forecasts for 2024, click on the link below to get your free report today!<\/p>\n","protected":false},"excerpt":{"rendered":"

Reflecting on the challenges of 2022, investors contemplate the potential return of a negative stock-bond correlation in 2024.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-13080","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=13080"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13080\/revisions"}],"predecessor-version":[{"id":13084,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/13080\/revisions\/13084"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=13080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=13080"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=13080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}