Typically bond and stock prices are inversely correlated – providing what your friendly local asset allocator/wealth manager calls diversification or balance. However, at times of crisis, things get a little out of hand. In the last 6 years, there have been two instances of extreme high correlation between stock price returns and bond price returns – the first was at the peak in stocks in 2007 and led to a calamitous plunge in equities and rally in bonds; the second was amid full crisis mode in the fall of 2010 when QE2 was announced to save the world (followed by an equity and bond price rally). So, this time, with correlations running high, what happens next?
It seems the consistent message from a high correlation between stocks and bonds is bonds rallied.