The Fed cratered stock-bond diversification, what's next?

The performance of balanced funds has become especially challenging in 2022. In most recessionary equity bear markets, falling stock prices were offset by rising bond prices or falling bond yields. The fixed income component of a balanced fund portfolio has usually acted as a counterweight to equities.

Not so in 2022. You would have to go back to the double-dip recession of 1980-1982 to see a prolonged period of positive correlation between stock and bond prices. That era was characterized by the hawkish Volcker Fed, which was determined to keep raising rates in order to squeeze inflationary expectations out of the economy. Fast forward to 2022, the Powell Fed appears to be on a similar path. What does that mean for investors?

Here are the challenges for stock, bond and balanced fund investors as we peer into 2023.

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