There is a rare but highly damaging phenomenon for portfolios called “Triple Red,” which consists of a simultaneous decline in U.S. equities, U.S. Treasuries, and the dollar. A note from MSCI analyzes the phenomenon and argues that a similar configuration could exist today: political uncertainty that deteriorates institutional confidence, price pressures linked to tariffs that complicate potential monetary easing, and the possibility of coordinated retaliation acting as an external shock channel.
A “Triple Red” episode breaks “classic” diversification and, for non-U.S. investors, adds a second blow: in addition to losing from the decline in assets, they also lose due to currency depreciation. For this reason, MSCI recommends subjecting portfolios to stress tests based on scenarios already known in history.
The Risk of a Persistent Pattern and a Bit of Historical Perspective
MSCI emphasizes that “Triple-Red” episodes were more common before 2000 and almost disappeared for nearly two decades, which led many investors to take favorable correlations (equities vs. bonds) and the role of the dollar as a safe haven for granted. The key risk, according to the text, is not only that a one-off episode occurs, but that it transforms into a regime (a persistent pattern lasting months or years), because in that case diversification becomes structurally eroded.
To understand when and how a Triple-Red regime can last, MSCI analysts look to history and highlight two precedents where the dynamic was not a simple market “scare.” The first is the stagflation of the 1970s (1973–74): a context of external shocks (then, the oil embargo), high inflation, and authorities caught between fighting inflation or supporting growth, which weakened the credibility of economic policy and favored simultaneous sell-offs across multiple asset classes.
The second precedent is the period following the Plaza Accord in the late 1980s, when coordinated efforts to weaken the dollar coincided with equity market tensions (including the 1987 crash) and upward pressure on bond yields.
Based on this framework, the report highlights that the worst historical episode for a foreign investor in a typical 60/40 portfolio occurred in 1987, with an approximate cumulative drawdown of 31% over four months.
Seeking a Predictive “Stress Testing” Framework
To quantify impacts, MSCI uses its predictive “stress testing” framework and applies the shocks to a diversified global portfolio combining global equities, bonds (mainly U.S.), and real estate, among other components.
The report notes that for a dollar-based investor there may be some relative “relief” from certain European assets, because euro appreciation would increase the dollar returns of European bonds. However, the impact changes drastically for European investors: when translating results into local currency, the estimated decline of the “composite” rises to around 19% in euros and 20% in Swiss francs, precisely because dollar depreciation amplifies losses in U.S. assets.
The final message is one of risk management: MSCI suggests that, instead of treating recent episodes as transitory anomalies, investors could benefit from stress-testing their portfolios against sustained correlation breakdowns, reviewing currency exposures (and the implicit reliance on the dollar as “insurance”), and identifying allocations more resilient to a stagflation-type environment.
