The last couple of weeks were a reminder of something the market learned painfully in 2022 and seems determined to relearn on a rotating basis: the stock-bond relationship is not as reliable as you think.
Between May 14 and May 19, the 10-year Treasury yield surged 20 basis points to 4.67%. The S&P 500 shed roughly 150 points. Not a crash, but a sharp enough jolt to make the point. When rates move up with conviction, stocks and bonds fall together, and the foundational logic of the traditional 60/40 portfolio quietly breaks down.
This is not a new observation. But knowing something and actually feeling it in a portfolio are two different things.
How We Got Complacent
Go back to the 1980s and 1990s, and the stock-bond correlation was solidly positive, averaging around 0.34 in the 1980s and 0.30 in the 1990s. Stocks and bonds tended to move in the same direction. Diversification, in the modern sense, was not really the point; growth was the point, and everything went up together as inflation fell, rates declined, and the economy expanded through two decades of broadly favorable conditions.
The shift happened in the early 2000s. The correlation turned negative, bottoming at around -0.52 in 2015 and averaging -0.24 through the 2010s. For the better part of two decades, when stocks fell, bonds rallied. The 60/40 worked beautifully. Rebalancing felt automatic. Risk management felt elegant. A generation of investors and advisors built their practices around a relationship that, in historical context, was actually the exception, not the rule.
That is the complacency. We mistook a 20-year regime for a natural law.
2022 Was the Wake-Up Call...