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Asset Class Rolling Correlation
The figure below illustrates the rolling 3-year correlation between U.S. stocks and U.S. Treasury Notes. At times the returns of the two asset classes move in similar directions and have positive correlation (above the 0 line) and at other times they move in opposite directions causing negative correlation (below the 0 line).
Does the figure suggest that stocks and bonds do not work together in a portfolio because the two asset classes do not have consistent negative correlation? No, just the opposite is true. They work very well together. The exact correlation between stocks and bonds are not predictable, but we CAN predict that the correlation between stocks and bonds will vary in the future, and that is important. No two asset classes have consistent negative correlation with each other. However, with enough asset classes in a portfolio, something will have negative correlation with something else most of the time.
