[1-Minute Knowledge] Has the correlation between interest rates and stock prices broken down?: Asset allocation strategy for a new era
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Chapter 1: The End of Tradition, or a Temporary Distortion?
From the late 20th century to the present, the premise that "stocks and bonds are inversely correlated" has been considered a standard in asset management.
In risk-on environments stocks rise, in downturns or risk-off scenarios bonds are bought, and stock prices fall.
The “60/40” portfolio (60% stocks, 40% bonds), built on this negative correlation, has provided stable returns for decades to many investors.
However, in 2022, simultaneous declines in stocks and bonds, centered in the United States, shook this premise significantly.
With inflation staying high and central banks rapidly raising rates, the phenomenon that “neither stocks nor bonds are safe” became a reality.
In this article, we explore whether the relationship between interest rates and stock prices truly broke down, the structural factors behind it, and asset allocation strategies suited to the coming era.
Traditional Relationship Between Interest Rates and Stock Prices
The Balance Between Economic Growth and Interest Rates
Boom → corporate earnings rise → stock prices rise
Overheating → rate hikes → downward pressure on prices (stocks and bonds)
When interest rates are low, the present value of stocks increases, and borrowing costs for companies fall, which is positive for stock prices.
Conversely, rising interest rates tend to negatively affect stock valuations.