Current macro conditions suggest that negative stock-bond correlation should re-establish itself sooner rather than later.

At the start of 2023, negative stock-bond correlation re-established itself as rising yields pressured the bond market while optimism about artificial intelligence boosted equity performance. Yet over the past few months, and similar to 2022, equities and bonds have moved lower in tandem.

As we head into 2024, there are questions about how investors can manage through market volatility. Admittedly in the near term, with inflation likely to settle at higher levels relative to the past, investors may have to be more nimble and flexible with their 60/40 stock-bond allocations. While we think a well-diversified portfolio of stocks and bonds remains important to ride out volatility and outperform cash, investors may want to expand their diversification toolkit to include alternatives to create more resilient portfolios.

Within alternatives, real assets such as real estate, infrastructure, transport and timberland can provide a good hedge against higher inflation and interest rates. In particular, these assets benefit from inflation-adjusted revenue streams, which can help boost portfolio returns from a real return perspective.

The longer-run question would be whether the 60/40 stock-bond portfolio will regain its former diversification potency. And if so, what conditions would be necessary to turn stock-bond correlations negative again?

Historically, positive stock-bond correlations are associated with a surge in inflation, and this tends to persist for a while. However, with increased asymmetry in the potential returns for fixed income given elevated yields, and our base case scenario for a slowdown in the U.S. economy, the diversification potential of bonds has improved meaningfully relative to 2022. This is especially true if the Fed is forced to cut interest rates in the event of a recession. Equities, on the other hand, may come under pressure if there is a significant slowdown in growth. Yet, they could just as well prove resilient if the economic landing is softer than expected.

Exhibit 8:

Source: Bloomberg, FactSet, HFRI, NCREIF, J.P. Morgan Asset Management; (Left) Standard & Poor’s; (Right) Cambridge Associates, Cliffwater, MSCI. *Stocks: S&P 500. Bonds: Bloomberg U.S. Aggregate. Alternatives: equally weighted composite of hedge funds (HFR FW Comp.), private equity and private real estate. The volatility and returns are based on data from the period 31/12/97 – 31/03/23. RE – real estate. Global equities: MSCI AC World Index. Global bonds: Bloomberg Global Aggregate Index. U.S. core real estate: NCREIF Property Index – Open End Diversified Core Equity component. Asia Pacific (APAC) core real estate: IPD Global Property Fund Index – Asia-Pacific. Global infrastructure (infra.): MSCI Global Quarterly Infrastructure Asset Index (equal-weighted blend). U.S. direct lending: Cliffwater Direct Lending Index. U.S. private equity: Cambridge Associates U.S. Private Equity Index. Hedge fund indices include equity long/short, relative value and global macro and are all from HFRI. All correlation coefficients are calculated based on USD quarterly total return data for the period 30/06/08 – 31/12/22, except correlations with Bitcoin, which are calculated over the period 31/12/2010 – 31/12/2022. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Asia. Data reflect most recently available as of 30/09/23.


With inflation trending down and growth likely to slow in the near term, current macro conditions suggest that negative stock-bond correlation should re-establish itself sooner rather than later. That said, it will be important for investors to calibrate exposure to equities, fixed income and alternatives in a proactive manner to achieve an optimal risk-return profile in 2024.