What the Fed Pivot Means for Asset Class Correlation

As the Federal Reserve (Fed) has shifted its policy to be more accommodative, both stocks and bonds have generated exaggerated returns. Depending on the reason for the Fed’s pivot, different scenarios could unfold. In light of this uncertainty, Leah Reed, Financial Engineer for Diversified Alternatives, believes investors should be especially mindful of diversification, paying close attention to correlation.

Key Takeaways

  • Central banks have shifted their policies to be more accommodative, causing stocks and bonds to move up.
  • A couple of scenarios could result from this shift in stance – the worst-case scenario being that stocks and bonds both fall together.
  • We believe a focus on diversification is more important than ever in this environment, but caution that investors should be aware of how different types of strategies are correlated with the market.