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Rising inflation, fiscal deficits, and geopolitical pressures have driven stocks and bonds into positive correlation, potentially undermining their long-standing role as mutual portfolio hedges.

What caught our eyes this week

Tough sledding for the 60/40

One of the key challenges in portfolio construction today is a shift in the relationship between stocks and bonds. For much of the past two decades, the two moved in opposite directions. When stock prices fell, bond prices tended to rise, smoothing out portfolio returns by providing attractive rebalancing opportunities. But lately, that dynamic may be changing. Stock-bond correlations have turned positive in recent years, a pattern more reminiscent of the 1970s through the 1990s than the post-2000 era. We can point to several forces that could be driving this shift in behavior, including the return of inflation, persistent fiscal deficits, and rising geopolitical fragmentation, each of which could introduce new scenarios in which bonds don’t hold up as well as they used to during periods of equity market volatility. Importantly, we believe that both stocks and bonds continue to serve valuable roles in a diversified portfolio that seeks a balance of capital appreciation and income. But if this new correlation regime proves durable, investors may benefit from broadening their diversification toolkit.

Graph showing the three-year trailing correlation of returns between the S&P 500 and Treasuries

CHART OF THE WEEK: Cerity Partners, FactSet, S&P 500, Bloomberg US Treasury Index, LBMA Gold PM, January 1974–February 2026, monthly rebalanced.

Past performance does not guarantee future results.

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