Bonds Won't Save You From The Next Recession

The traditional 60/40 equity-bond portfolio no longer provides reliable downside protection due to a structural shift in equity-bond correlation. Negative correlation prevailed during the low-inflation period 2000–2021 but is unlikely to return soon, implying higher tail risk for balanced portfolios. Portfolio managers should reassess allocation assumptions and consider alternative diversifiers and inflation-sensitive hedges given the changed correlation regime.

Analysis

The traditional 60/40 equity-bond portfolio no longer provides reliable downside protection due to a structural shift in equity-bond correlation. Negative correlation prevailed during the low-inflation period 2000–2021 but is unlikely to return soon, implying higher tail risk for balanced portfolios. Portfolio managers should reassess allocation assumptions and consider alternative diversifiers and inflation-sensitive hedges given the changed correlation regime.