No More Free Lunch?

Marquette Associates, a Chicago-based investment consultant, published a commentary titled "No More Free Lunch?" examining the changing relationship between stocks and bonds. Nobel laureate Harry Markowitz's description of diversification as "the only free lunch in investing" held for more than four decades. From 1976 through 2019, the Bloomberg U.S. Aggregate Bond Index delivered annualized returns of 7.3% with a standard deviation of 5.3%. Because the two asset classes were largely uncorrelated, a portfolio with 90% in the Aggregate Index and 10% in the S&P 500 could raise returns while reducing risk.

That dynamic has weakened since 2020. According to Marquette, the efficient frontier for stock-bond combinations has steepened since the start of 2020, requiring investors to accept more risk for higher returns. The 100% S&P 500 portfolio posted the highest Sharpe ratio (0.69) on the 2020–2026 frontier, so any fixed income exposure reduced risk-adjusted returns over that window.

Marquette attributes the shift primarily to the breakdown in the stock-bond correlation. The Aggregate Index's correlation with the S&P 500 was 0.20 over 1976–2019 but has been 0.51 since 2020. In 2020, the Federal Reserve's easing lifted both markets, with the Aggregate Index returning 7.5% and the S&P 500 returning 18.4%. In 2022, high inflation and tighter financial conditions pushed both lower, with the Aggregate Index down 13.0% and the S&P 500 down 18.1%. The firm cites the growing weight of long-duration growth companies in equity indices, whose valuations are highly sensitive to interest rates, as a key contributor.

Marquette concludes that diversification remains valuable because stocks and bonds are not perfectly correlated. It notes that higher bond yields now provide meaningful income that was largely absent in the low-rate environment of the early 2020s. The firm expects the historical stock-bond relationship could reassert itself as inflation moderates and monetary policy normalizes, though this is presented as an outlook rather than a certainty.