Nevertheless, even in the pre-2002 era when this correlation was generally positive, in 42% of the months, bonds and equities moved in opposite directions. And vice versa: When the correlation was generally negative, bonds and equities moved in unison in 42% of the months. The correlation clearly shows an average trend; but even in periods of negative (positive) correlation, we still see a considerable number of months with positive (negative) bond-equity co-movement.
The explanation may lie in the underlying drivers of the bond-equity correlation. In times of low growth, when equities historically dropped and the central banks tended to lower interest rates, bonds and equities tended to move in opposite directions — a negative correlation that can be exacerbated by an equity-to-bond flight to quality in volatile market conditions. In times of high uncertainty about inflation, on the other hand, both bond and equity prices historically fell.
Financial markets, therefore, can behave differently from month to month, depending on what dominates the news. For example, in February 2018, the U.S. stock market fell 3.7%, while the 10-year U.S. Treasury yield went up by 15 basis points — displaying positive correlation. Also, in October 2018, stocks dropped 6.9%, while the yield went up 10 basis points (again, in positive correlation). In December 2018, however, stocks fell 9% and the yield went down by 32 basis points (negative correlation). This highlights the importance of assessing risk under different correlation regimes.