Stocks Go Down, Bonds Go… Down?
The comments below are an edited and abridged synopsis of an article by Johan Palmberg and Louise Street
The conventional wisdom that stocks and bonds are negatively correlated is a central component of most asset allocation strategies. But the correlation hasn’t always been negative and there are increasing signs of strain in the relationship, prompting investors to ask: Could the stock-bond correlation flip? The authors consider that possibility and what it might mean for the average portfolio, and how gold could help to protect portfolio performance.
In conclusion, they write: “Which is where gold enters the conversation. In previous research, we have thoroughly demonstrated the benefit of adding gold to a portfolio and its track-record of improving risk-adjusted returns, due to its uniquely effective role as a liquid diversifier and risk hedge.”
“In beefing up the equity allocation, the ‘standard’ portfolio would benefit from an allocation to gold given its asymmetric correlation to equities: close to zero when equities perform well, but significantly negative when they don’t. In our analysis, gold’s correlation to equities was largely unaffected by the regime shift in inflation before and after 1997 (scenarios A and B), and gold tends to perform well in a higher, or more volatile, inflation environment.”
“All of which suggests gold could play a pivotal role in delivering enhanced portfolio performance in the years ahead.”