Matthias Knab, Opalesque: Russ Koesterich, Head of Asset Allocation for BlackRock's Global Allocation Fund, writes on Harvest Exchange:
History since the turn of the millennium has been marked by several themes: an ever growing dependency on smart phones, the recent trend towards populism and the economic rise of China. Negative stock-bond correlations rarely make the list.
Admittedly not quite rising to the significance of the smart phone, but this is a big deal from the narrow perspective of the asset allocator. Since 2000 stocks and bonds have tended to move in opposite directions. This propensity towards negative correlation has made bonds a reliable hedge against equity risk. Whether this trend continues is key for how investors build portfolios.
It is important to recognize that stock-bond correlations have not, as a matter of course, always been negative. In fact, over the long term stock-bond correlations average roughly zero. That said, the average masks two very distinct periods. See the chart below.
{View chart on Harvest}
From the 1980s through the bursting of the tech bubble, correlations were reliably positive, averaging 0.50. This was a period when traders anxiously awaited every weekly money supply print and had to divine Federal Reserve (Fed) policy without explicit communications.
The second pe...................... To view our full article Click here
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