Blog: Is the Stock/Bond Relationship Broke? Nope, but it's changed.
Bonds are still a diversifier.
Over the last couple of years there have been a number of articles which discuss the increased correlation between stocks and bonds. Many question whether bonds will continue to be a good diversifier, and the future of the 60/40 balanced mix. There are even those who believe this increase in correlation has implied that bonds are no longer a safe haven.
There's good news and bad news. The bad news is that the relationship has changed and bonds will be more volatile and more highly correlated to equities than they have since the mid-1990s. This change will remain for the foreseeable future. The good news is that this is a normal part of the inflation cycle and has happened numerous times in the past. Very high correlations are tied to high levels of inflation, but with inflation moderating we can expect better diversification from bonds though the negative correlation of the last decade will likely not return for a long time except during panic stock market sell-offs.