The correlation between U.S. equity prices and bond yields is signaling another risk-off period may be lurking. The asset classes move in regimes – the correlation between stock prices and bond yields was largely positive from 2000-2022 as equities tended to move in the direction of yields as inflation mostly coincided with growth. Stocks held a negative correlation to yields from the 1970s through the 1990s, when inflation hurt stocks, and that phenomenon returned with 2022 bear market.
Historically, equity market corrections have occurred when the correlation departed from its primary regime. Disruptions to the persistently negative correlation regime in the 80s and 90s occurred in 1987 and 1998, as correlations shifted positively. Likewise, disruptions to the positive correlation regime of the post-2000 period occurred just before the 2007 and 2015 peaks in stocks, and again in 2022. After holding a positive regime stance since April 2025, the correlation has once again lost its bearings and has rapidly shifted into negative territory.
While the stocks-bonds correlation is just one of 13 signals we utilize for assessing the near-term outlook for stocks, it is now a detracting factor. Inflation is once again a nag on financial assets.
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