The classic 60/40 portfolio, which consists of 60% bonds and 40% stocks, hasn’t performed well in the past few months, with the two assets mostly posting a positive correlation and investors worrying the Federal Reserve may keep interest rates higher for longer.
The S&P 500 SPX has lost 2% for the past three months, while the 10-year Treasury BX:TMUBMUSD10Y yield added about 54.7 basis points during the same period, according to FactSet data. Bond yields and prices move in opposite directions.
For stocks and bonds to post a negative correlation again, there has to be a change in the inflation regime, Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset solutions at Goldman Sachs Asset Management GS, +0.69%, said in a roundtable discussion held by the bank.
“We do agree that you’re going to continue to see that disinflationary trend, which could take a little bit longer than expected, but ultimately, we should get down to that 2% [interest-rate] target with the current level of rates that we’re seeing,” said Wilson-Elizondo.
Still, the Treasury markets have been mostly driven by a large amount of leverage, which primarily comes from the U.S. federal deficit, Wilson-Elizondo noted. “Every time you see large funding announcements or expectations of issuance, it makes it very hard for the rate market to rally even with the disinflationary trend,” she said.
Investors have to watch a large election cycle across different economies to look for signs of changes, according to Wilson-Elizondo. “Ultimately, we do expect in particular the front end of the curve to perform quite well in a selloff,” she added.
Investors should also look at other assets, such as gold and commodities, for diversification and risk-management purposes, the analyst noted.
U.S. stocks traded mostly higher Wednesday, with the Dow Jones Industrial Average DJIA up 0.1%. The S&P 500 was up less than 0.1% while the Nasdaq Composite COMP dipped 0.1%, according to FactSet data.