Both stocks and bonds tumbled last year, pummeling a 60/40 portfolio.
NYSE
After a historically ugly 2022, the standard portfolio of stocks and bonds is having a strong 2023. Expect some bumps along the way.
Last year was a rough one for the “60/40 portfolio.” That’s a portfolio of 60% stocks and 40% bonds, mostly 10-year government debt. The idea is for long-term investors to keep over half their investment in stocks, but still retain substantial protection from safe government bonds, the interest payments of which are guaranteed.
There was no protection from anything in 2022; stocks and bonds plummeted, as the Federal Reserve raised rates to tame high inflation. For stocks, higher rates mean lowered earnings expectations. For bonds, higher rates mean lower bond prices, causing losses for fixed-income investors.
This year, though, there has been a “reversal trade,” which means stock and bond prices have both risen. The three major U.S. indexes are in the green for the year, while the 10-pyear Treasury yield is down, meaning its price is up. Markets expect the Fed to pause its rate hikes soon, or even cut them, as the rate of inflation declines. Expectations of a stabilization in the economy—and earnings—have sent stocks upward, while the expectation that rate hikes are almost over have sent bond prices up. The 60/40 portfolio had gained 6.8% for the year through Thursday, according to Bank of America, the best start to the year through that point since 1991.
From here, it’s unlikely to be a smooth ride upward for investors. The 10-year yield is already creeping higher from its low point for the year, so its price is dipping. The risk is that the Fed needs to raise rates more from here, especially since the consumer price index’s January gain reported Tuesday was 6.4%, lower than December’s result, but above the expected 6.2%. More rate hikes would hurt stocks, but even without them, earnings could keep weakening because of already-high rates.
The good news is that Fed’s rate-hiking campaign is nearer the end than the beginning. The bad news is that end isn’t here yet, and more pain in markets could be coming.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
Credit: marketwatch.com