How to Navigate the 'Slightly New Normal' in 2023

How to Navigate the 'Slightly New Normal' in 2023

Once financial markets consider inflation to be under control, stocks and bonds should return to their long-standing negative correlation — moving in opposite directions — Columbia Threadneedle’s North American asset allocation chief predicted this week, recommending investors seek resilient companies as markets find a “slightly new normal” next year.

“Back to normal for asset allocation means a return to diversification between stocks and bonds, and expectations of positive returns for both asset classes over the medium-to-long term — even if we’re starting at dramatically higher interest rates,” Joshua Kutin wrote in a blog post Thursday.

“This is good news for multi-asset portfolios, which really struggled in 2022, as correlations between stocks and bonds turned positive. But I also think we’ll have a new normal that involves being more selective within these allocations.”

Kutin noted that the multi-decade relationship between stocks and bonds broke down in 2022,  posing performance challenges for multi-asset portfolios. While the positive correlation between stocks and bonds will likely continue into 2023, he wrote, investors should expect a return to negative correlations when investors are convinced inflation is under control.

Shifting correlations and the possibility of recession and long-term high inflation underscore the need for investors to consider risk allocation in multi-asset portfolios and diversify within asset classes rather than deciding only between stock and bond classes, according to Kutin.