The stock-bond correlation and macroeconomic conditions: One and a half centuries of evidence

Using monthly stock and bond return data in the past 150 years (1855-2001) for both the US and the UK, this study documents time-varying stock-bond correlation over macroeconomic conditions (the business cycle, the inflation environment and monetary policy stance). There are different patterns of time variation in stock-bond correlations over the business cycle between US and UK, which implies that bonds may be a better hedge against stock market risk and offer more diversification benefits to stock investors in the US than in the UK. Further, there is a general pattern across both the US and the UK during the post-1923 subperiod and during the whole sample period: higher stock-bond correlations tend to follow higher short rates and (to a lesser extent) higher inflation rates.