Inflation is on the rise in many parts of the world, and that means interest rates likely will be too. Financial asset pricing models suggest that inflation can influence stocks and bonds similarly, resulting from a shared relationship with short-term interest rates. Therefore, some investors have begun to wonder: Will stock and bond returns start to move in tandem and, if so, what could that mean for diversification in a balanced portfolio?
To answer these questions, my colleagues and I have identified the factors that have historically driven stock and bond co-movements over time and have published our findings in The Stock/Bond Correlation: Increasing Amid Inflation, but Not a Regime Change. Chief among those drivers is inflation, and we found that it would take considerably more inflation than we’re expecting for stocks and bonds to move together to a degree that would diminish the diversifying power of bonds in a balanced portfolio.1
Kevin DiCiurcio is a senior investment strategist in Vanguard Investment Strategy Group. He is head of Vanguard Capital Markets Model® research team, which designs models for asset class return forecasts and quantitative portfolio construction. Within the team, Mr. DiCiurcio is responsible for managing the asset allocation of multiasset portfolios using quantitative modeling tools. He also conducts research related to portfolio construction and fixed income investing. Prior to this, Mr. DiCiurcio designed portfolios for Vanguard’s institutional clients using quantitative asset allocation tools and previously worked in Vanguard Risk Management Group supporting fixed income investment risk.
Mr. DiCiurcio earned a B.S. in finance from the University of Richmond and an M.B.A. from Villanova University. He is a CFA® charterholder.