Equities and bonds are widely considered to be complementary investments on the assumption that when one performs badly, the other will perform well. However, the diversification benefit of holding these assets alongside one another diminishes as the correlation between them increases. Determining equity and bond correlation is, therefore, an important consideration when an investor making their investment allocation.
In the chart below, we show the correlation between equities and bonds over the past 50 years. The belief that equity and bond returns are negatively correlated appears to be based on recent experience. Over a longer time horizon, the relationship has varied and, in particular, it changed abruptly during the late 1990s. Before January 1998, the average correlation was +24%; afterwards, this figure drops to -36%.