In recent years, there has been a significant transformation in the risk dynamics of capital markets, affecting both equity and fixed income. This shift goes beyond a simple increase in risk levels; there's now a heightened severity and frequency of volatility shocks in these markets. The traditional diversification benefits of equity and fixed income allocations have diminished due to a higher correlation between stocks and bonds, primarily influenced by a substantial institutional shift from active to passive investing over the past two decades. This move has altered the landscape of price discovery, with retail participation introducing more emotional and volatile elements, resulting in deeper drawdowns in both equity and fixed income markets.
Michael Hunstad on Credit Markets and Market Risks