Famed 60/40 portfolio is so beaten down it’s almost cheap again

Blame the Fed, the war, and fiscal waste all you want. But long before these threats took hold, big problems lurked in many popular portfolio strategies.

That’s the finding of new research using a yield-derived valuation model to show that the famous 60/40 allocation hit its most expensive level in nearly five decades during the Covid-19 rally. The situation has reversed in 2022, which is now by some definitions the worst year ever for the bond and equity cocktail.

The data is a stark reminder of the primacy of valuation in determining returns. It could also pass as good news for the investment industry, as logic rather than broken markets are driving the current carnage. Leuthold Group says the hammering has been so brutal that valuation could once again become a tailwind for a portfolio design many seem willing to leave for dead.

“This year has been nothing short of a disaster, one foreseen by commentators who recognized that it was foolish to hedge one overpriced asset with another overpriced asset and expect a satisfactory outcome,” said Scott Opsal of Leuthold. “On the other hand, this year’s stock and bond routings have significantly improved the expected returns of both asset classes, and the 60/40 may be poised to rise from the ashes.”

It is worth considering the heights, from which 60/40 fell. Bloomberg USAgg Index returns fell to 1.12% in 2021, while the S&P 500 earnings yield fell to 3.25%, one of the lowest levels in four decades. Taken together, the levels had never implied a more bloated starting point for cross-asset investors, according to Opsal.

Certainly, the 60% stock/40% bond mix has historically done a good job of protecting investors from market volatility. This year was different, with stocks and bonds falling simultaneously amid stubbornly high inflation and the Federal Reserve’s all-for-me attempt to bring it down. A Bloomberg model, which tracks a portfolio of 60% equities and 40% fixed income, is down 20% this year, just a hair’s breadth from beating 2008 as its worst year ever and only the third year that it has a decline since Bloomberg began tracking the data in 2007.

The alignment of stocks and bonds has tightened “decisively” in 2022, with three-month rolling correlations rising to a 23-year high of 45% versus the 10-year average of minus 25%, according to Credit Suisse. In other words, both are selling off at the same time, with the two recently posting 11 straight days of moving in together, a streak not seen since 1997. And their performance this year is twice as bad as it was in 2002, when stocks posted a similar decline.

“We came from historically high valuations for both equities and fixed income,” said Marvin Loh, senior macro strategist at State Street Global Markets, in an interview. But the strategy could soon start doing what it’s supposed to do, he added, “because you’re going in with fixed income valuations, which make a lot more sense than 0.3%.”

Many others have shared this view – cross-asset strategists at Morgan Stanley said over the summer that the 60/40 portfolio is merely dormant and not dead yet, while researchers at the Independent Adviser for Vanguard Investors said it was a bad time “breaking new ground” and abandoning the balanced approach.

https://economictimes.indiatimes.com/markets/stocks/news/famed-60/40-portfolio-is-so-beaten-down-its-almost-cheap-again/articleshow/94975116.cms Famed 60/40 portfolio is so beaten down it’s almost cheap again

Russell Falcon

Pechip.com is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – admin@pechip.com. The content will be deleted within 24 hours.

Related Articles

Back to top button