On September 11th, Junfeng Li, Schroders Global Diversified Asset Strategy Specialist, wrote that the correlation between stocks and bonds is a key cornerstone of the traditional 60/40 investment portfolio, and due to various factors during the pandemic leading to high inflation, the correlation between stocks and bonds is expected to turn positive by mid-2022. Subsequently, global central banks began taking massive monetary policy actions to lower inflation, and after months of observation, Schroders Global Investments began to see inflation gradually easing, with the Federal Reserve confirming its moderate stance at the Jackson Hole global central bank annual meeting. Currently, inflation has not yet reached the target level, but has greatly declined from its peak. Junfeng Li pointed out that in early August 2024, the closure of yen carry trades due to a rate hike by the Bank of Japan, combined with further deterioration caused by soft US labor market data, led to a sell-off in financial markets, impacting the stock market as well, with the S&P 500 falling by 6% from July 31st to August 5th. However, during this period, bond yields also fell, while the US Treasury bond index rose by 2.2%, helping to mitigate the drawdown of the 60/40 investment portfolio. As mentioned earlier, inflation is a key factor in the correlation between stocks and bonds, and is slowly but steadily cooling down. In July 2024, the overall Consumer Price Index (CPI) unexpectedly fell by 0.1% year-on-year, while the core CPI was expected to rise by 3.2% year-on-year. This situation is favorable for curbing inflation. Historical data shows that when the core CPI is below 2.5% year-on-year, the long-term correlation tends to be negative. If inflation continues to decline, the long-term correlation may return to a negative state. Junfeng Li believes that if the negative correlation between stocks and bonds seen in the pre-pandemic years reappears, bonds could once again become a hedge against risk. A stable global economic outlook, as well as a background of restoring balance between economic growth and inflation, may help bonds play a role. However, even if inflation is no longer the main issue, the correlation between stocks and bonds may still remain positive in various scenarios. For example, investors may be disappointed with the speed of economic recovery, or may become increasingly concerned about fiscal deficits. In this case, investors will need to reevaluate the role of bonds in their portfolio. A positive correlation between stocks and bonds may weaken traditional diversified investment strategies, so investors may need to reassess asset allocation to achieve ideal risk-adjusted returns. Implementing flexible asset allocation and researching other hedging tools may also be key factors in managing this environment.