Goldman Sachs recently released a chart depicting the low or negative correlation between stocks and bonds we have seen over the past few decades. This has been attributable to the low inflationary regime over the period. This makes perfect sense given monetary policy's operation over the last twenty-five years. Counter cyclical policy is very effective in periods of low and stable inflation. When equity markets become concerned about recessions ahead, earnings expectations reduce and valuation multiples contract. Stock prices fall. Bond markets typically would then anticipate the increased chance of the standard monetary policy response; cutting interest rates to spur economic growth. Bond prices rise.
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