The breakdown of the classic portfolio hedge

This paper empirically investigates the structural integrity of the traditional stock-bond relationship, the cornerstone of the 60/40 portfolio, during the high inflation period of 2022-2023. The aim is to quantify the nature of the stock-bond correlation shift and determine if it represents a distinct market regime compared to prior crises. The methodology utilizes a univariate two-state Markov-Switching model applied to daily returns of the SPDR S&P 500 ETF (SPY) and the iShares 20+ Year Treasury Bond ETF (TLT) from 2007 to the end of 2023 to endogenously identify distinct market regimes. The results show that while the stock market's "Crisis" regime was active during the Global Financial Crisis, COVID-19, and the 2022 downturn, the bond market's reaction differed fundamentally. In 2022, both stocks and bonds were simultaneously in their high volatility, negative-return "Crisis" regimes, a stark contrast to prior crises where bonds acted as a "Safe Haven." It is concluded that the diversifying power of U.S. Treasury bonds is regime-dependent and fails during inflation-driven downturns, representing a fundamental regime shift and a significant challenge to traditional asset allocation