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Rekenthaler Report

Will Stock and Bond Performance Converge?

Considering the possibility of a new investment paradigm.

So Far, So Good
The phrase “risk on/risk off” refers to when the financial markets are binary. Either safe assets rise at the expense of risky securities because investors are pessimistic, or the reverse. This pattern is most apparent when stocks crater, and then during their subsequent rebounds. In the first half of October 2008, for example, U.S. stocks dropped 25% while long Treasuries rose. Equities then rallied for three weeks, regaining 8% of their losses, as Treasuries retreated.

However, stocks and bonds have generally taken opposite paths even when volatility has been quiet. For the decade of the 2010s, when the U.S. equity markets were unusually tame, the correlation of weekly total returns between the S&P 500 and the Bloomberg Barclays U.S. Treasury 20+ Year Index was negative 0.47. That is about as negative as investment correlations get.