LEARN · CROSS-ASSET SIGNALS

What Drives the Bond-Stock Correlation and When Does It Turn Positive?

The bond-stock correlation is primarily driven by the inflation regime. In low-inflation environments, the dominant equity risk is recession — bonds benefit from flight-to-safety, producing negative correlation. In high-inflation environments, both bonds and equities are hurt by rising rates — producing positive correlation. The shift from negative to positive correlation eliminates the 60/40 portfolio's diversification benefit and is a key regime transition signal.

AhaSignals Research · Not investment advice

Historical Bond-Stock Correlation by Inflation Regime

Academic research (e.g., Ilmanen 2003, Campbell et al. 2020) documents that the bond-stock correlation has been negative in the US since the late 1990s — a period of low and stable inflation. Before the 1990s, when inflation was higher and more volatile, the correlation was positive. The 2022 episode marked the first sustained positive bond-stock correlation since the 1970s–1980s, driven by the return of high inflation.

This historical pattern supports the regime-conditional view: the bond-stock correlation is not a structural constant but a regime-dependent variable that investors must monitor actively.

Confidence level: Well-supported — the inflation-correlation relationship is documented in academic literature. Not investment advice.

Known Limitations

The correlation can be temporarily distorted by central bank intervention, flight-to-safety episodes, or technical factors
The transition between correlation regimes is gradual and difficult to time precisely
Not investment advice.