US Stock-Bond Correlation: What are the Macroeconomic Drivers?

24 Pages Posted: 28 May 2021 Last revised: 2 Jun 2021

Date Written: May 13, 2021

Abstract

US stock-bond correlation, which plays an important role in institutional portfolio construction, has been persistently negative for the last 20y. This negative correlation allows stocks and bonds to serve as a hedge for each other, enabling CIOs to increase stock allocations while still satisfying a portfolio risk budget. However, stock-bond correlation is not immutable. In fact, it was consistently positive for more than 30y prior to 2000. A return to positively correlated stock and bond returns may require CIOs to rethink their asset allocation.

Keywords: IAS, PGIM, PGIM IAS, Institutional Advisory & Solutions, Portfolio construction, Stock, Bond, Correlation, Macroeconomic, Macroeconomic Drivers, Correlation Regime, Negative Correlation, Positive Correlation, Monetary Policy, Fiscal Policy, Institutional Portfolios, Asset Allocation, Returns

Suggested Citation

Shen, Junying and Weisberger, Noah, US Stock-Bond Correlation: What are the Macroeconomic Drivers? (May 13, 2021). PGIM IAS - May 2021, Available at SSRN: https://ssrn.com/abstract=3855610 or http://dx.doi.org/10.2139/ssrn.3855610

Junying Shen (Contact Author)

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States

Noah Weisberger

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States
201-207-6879 (Phone)

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