Morningstar - Q2 2023 - 29

-20
-15
10
US Moderate Target
Allocation
-10.74
-25
EXHIBIT 2
On the other hand, Timmer says, for periods
when the inflation rate has been above
its long-term average, " The negative correlation
between stocks and bonds isn't really there:
Bonds don't protect against losses in the stock
market. " The sky-high inflation of the past
year was a big part of why stocks and bonds
suffered together.
Bonds and Stocks Move Together Often-
but Mostly Higher
When stocks and bonds both move in the
same direction, it only hurts when they're both
on a downswing.
Last year was a clear anomaly, with bonds and
stocks each suffering double-digit losses.
But the two had already shown some positive
correlation in the years leading up to 2022.
In four of the five most recent calendar years
before 2022, both stocks and bonds rose,
as measured by the Morningstar US Market
and US Core Bond indexes.
In fact, overall stocks and bonds have shown
positive correlations in 15 of the past 20 calendar
years leading up to 2022, each earning positive
returns every time. The risk of double-whammy
losses was there, but positive correlations had
mostly been favorable for investors, until
2022 flipped things upside down ( EXHIBIT 3 ).
" A big takeaway from last year is that bonds
and equities really can go down at the same time, "
says Todd Schlanger, senior investment
strategist at Vanguard. " We can't let ourselves
forget that this can happen. "
Correlations Can-and Do-Change
What many investors don't realize-or had
forgotten-is that correlations aren't written
in stone.
" One of the things that we hear a lot about
is that bonds and stocks are negatively correlated, "
says Capital Group's Queen. " The fact is,
though, that really only started in the '90s when
Alan Greenspan was Fed chair. "
The driver of this shift, Queen says, was what
became known as the Greenspan put: Whenever
Correlations Between Stocks and Bonds Negatively correlated bonds move up
when stocks move down; positively correlated bonds move with stocks.
01/01/2022
06/01/2022
11/01/2022
03/31/2023
0.8
0.6
0.4
0.2
-0.2
Morningstar US
Short-Term
Treasury Bond
Morningstar US
Long-Term
Treasury Bond
Source: Morningstar Direct, Morningstar Indexes. Data as of March 31, 2023.
Correlations are based on the Morningstar US Market TR USD Index.
Morningstar US
Core Bond
Morningstar US
Corporate Bond
20-Year
2022
Q1 2023
Morningstar
US Market
-13.47
EXHIBIT 3
Win, Win ... Then, a Big Loss In most calendar years since 2000, stocks and bonds
both earned positive returns. Not so in 2022.
20%
2000
2002
2020
10
2008
-10
-20
Sources: Morningstar Direct, Morningstar Indexes. Data as of Dec. 31, 2022.
-40%
-20
Morningstar US Market
20
40
2018
2022
2021
2013
2019
5%
equities started to fall, the Fed would lower
rates to support equities and put a damper on the
strong, quickly globalizing economy. " Inflation
stayed low during that time, and the Fed
was able to be incredibly accommodative, "
bringing the negative correlation between bonds
and stocks to life, he says ( EXHIBIT 4 ). (This
-5
-10
-20
-15
later became more generally known as the
Fed put. The term put comes from the options
market, where investors use put contracts
to protect against suffering losses in stocks.)
In fact, going way back to the 1970s, says
Vanguard's Schlanger, stocks and bonds have
Morningstar
US Moderate Target
Allocation
-10.74
morningstar.com/products/magazine
29
Morningstar
US Market
ative Return
Morningstar US Core Bond
Correlation
Cumulative Return
http://www.morningstar.com/products/magazine
Morningstar - Q2 2023

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