Why Risk-On/Risk-Off may be a thing of the past

Stocks and bonds have not declined in unison like this since the dysfunctional days of the global financial crisis in late 2008Dan Acker/Bloomberg

The post-crisis era has been dominated by a risk-on/risk-off trading environment where risk assets such as stocks and safe assets such as bonds move in opposite directions. That may no longer be true.

Some have dismissed the recent spike in volatility as an isolated derivatives debacle rather than a regime shift in trading patterns. Yet, these gyrations are the results of rising inflation fears that are fueling concern that central banks may exit the markets sooner than anticipated.

From 1954 to 1966 and since 2001, the rolling five-year correlation between stock and bond prices was negative. These periods were dominated by a deflationary mindset.