From Morningstar: 2024-05-14 04:04:00

In the 2024 Diversification Landscape report by Christine Benz, Karen Zaya, and others, a deep dive into asset class performance and correlations showed that higher inflation brings stocks and bonds closer. Inflation surged in mid-2021 due to various factors, peaking at 9% in 2022 and remaining above 2% through 2023.

The reversal from long-term low inflation has caused a notable increase in stock/bond correlations, jumping to 0.58 in 2022 and 2023. Previous decades had low inflation, leading to negative or low correlations between stocks and bonds, but recent years show a shift.

Correlations historically rise in periods of high and prolonged inflation, impacting the relationship between stocks and bonds. Specific periods like the late 1960s and 1970s saw notable correlation increases due to various economic factors. Recent uptrends suggest a changing landscape for interest rates and inflation.

Despite rising correlations, bonds still offer diversification benefits and risk reduction in portfolios, even during inflationary times. Stocks and bonds are more aligned in inflationary periods, but bonds can play a critical role in maintaining balance and reducing risk at the portfolio level.



Read more at Morningstar: What Higher Inflation Means for Stock and Bond…