The stock/bond correlation amid rising inflation: Increasing, but hardly a regime change | Vanguard Canada

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With interest rates and inflation expected to rise, the negative stock/bond correlation that supports the diversification properties of a balanced portfolio could also be at risk. Vanguard’s new Global Macro Matters paper examines whether a higher-correlation regime is likely and the possible effect of an inflation increase.

Using machine learning techniques, the authors find that a return to a positive correlation regime similar to that of the pre-2000s is unlikely but that correlations could increase modestly over the next five years because of a higher inflation outlook. Although this could cause expected portfolio volatility to increase slightly, a persistently negative correlation regime suggests that the diversification benefits of a traditional 60% stock/40% bond portfolio will persist—although less than in the recent past. Additionally, the authors find that for long-term investors, higher correlations have virtually no impact on the expectations for and uncertainty in end-of-horizon portfolio outcomes.

Download the Global Macro Matters report.

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