What happens to bonds when stocks rise?

A reader asks a follow-up to a previous blog post:

Do you have a reverse chart showing what bonds do when the market goes up (which happens a lot more than it goes down)?

I recently looked at the historical performance of bonds when stocks fall:

In short, most of the time when stocks go down, bonds go up…but not all the time.

High quality bonds are a pretty good hedge against bad years in the stock market.

I’ve never looked at the other side of this before – how do bonds do when the stock market goes up?

Here’s a look at every positive year for the S&P 500, along with the corresponding 10-year Treasury yield since 1928:

Some investors mistakenly assume that stocks and bonds are negatively correlated, meaning that when stocks go up, bonds go down and when stocks go down, bonds go up.

But bonds have done well over the years for the stock market.

In fact, average yields for 10-year Treasuries were HIGH in up years than in down years:

Bonds are obviously much more stable than the stock market. The distributions of bond gains and losses have been similar during stock market ups and downs.

When the S&P 500 was positive, bonds had a negative return 20% of the time (ie 80% positive results).

When the S&P 500 was negative, bonds had a negative return 19% of the time (that’s 81% positive results).

The average return was similar and the win/loss ratios were similar.

What does this tell us?

Bonds are a pretty good diversifier.

Of course, there are market environments where bond and stock correlations can be detrimental to a portfolio. The most recent example was 2022 when both stocks and bonds fell in a rising rate/inflation environment.

Diversification works most of the time, but not all the time.

It is also interesting to note the average gains and losses for the stock and bond market.

The average up year for the stock market was a gain of over 20%, while the average down year was a loss of over 13%. For bonds, the average year up was +7.1%, while the average year down was a loss of -4.9%.

Bonds have also been positive overall for more years than stocks.

From 1928 to 2023, the 10-year Treasury ended the year with a gain 80% of the time, while the stock market rose 73% of all years during that period.

These figures provide a good explanation of the risk premium inherent in the stock market. The stock market has more than doubled the annual return of bonds over the 96-year period from 1928 to 2023, in part because there is more risk involved when holding stocks.¹

Gains are greater in the stock market, but so are losses.

You cannot earn a risk premium without taking some risk.

The good news for diversified investors is that there can be a time and a place for both asset classes.

Both stocks and bonds ended the year with simultaneous gains almost 60% of the time. Bonds ended the year outperforming stocks by 36% year-to-date.

The stock market wins in the long term, but that is not always the case in the short term.

Bonds are up most of the time, whether stocks are up or down.

It’s not perfect, but fixed income remains one of the simplest stock market hedges out there.

We covered this question in the latest edition of Ask the Compound:



My colleague Alex Palumbo joined us on the show this week to discuss questions about how to implement a large portion of cash savings, how to diversify company stocks, how to analyze financial performance, and how to think about alpha when it comes to picking a financial advisor. .

Further reading:
The Holy Grail of portfolio management

¹The S&P 500 rose 9.8% per year, while the 10-year Treasury gained 4.6% annually between 1928-2023.