The performance of the classic 60/40 portfolio, consisting of 60% bonds and 40% stocks, has been lackluster in recent months. Investors have grown concerned as both assets have exhibited a positive correlation, while the Federal Reserve’s potential decision to maintain higher interest rates adds to their worries.
According to FactSet data, the S&P 500 (SPX) has experienced a 3% decline over the past three months. In contrast, the yield on the 10-year Treasury (BX:TMUBMUSD10Y) has risen by approximately 53.9 basis points during the same period. It is worth noting that bond yields and prices move in opposite directions.
To restore a negative correlation between stocks and bonds, there needs to be a shift in the inflation regime, as stated by Alexandra Wilson-Elizondo, the head of multi-asset funds and model portfolio management at Goldman Sachs (GS). She expressed this view during a roundtable discussion hosted by the bank.
“While we anticipate a prolonged disinflationary trend, it may take longer than expected to reach our 2% interest-rate target, considering current rate levels,” Wilson-Elizondo explained.
However, Wilson-Elizondo pointed out that the Treasury markets have largely been influenced by significant leverage stemming from the U.S. federal deficit. “Whenever there are substantial funding announcements or expectations of increased issuance, it becomes challenging for the rate market to rally, even in the presence of a disinflationary trend,” she noted.
Furthermore, Wilson-Elizondo emphasized that investors need to closely monitor political cycles across various economies for indications of potential changes. “In a market downturn, we anticipate the front end of the curve to perform exceptionally well,” she added.
The analyst also advised investors to consider diversifying their portfolios and employing risk-management strategies by including other assets like gold and commodities.
On Tuesday, U.S. stocks concluded the day on a positive note, with the Dow Jones Industrial Average (DJIA) rising by 0.2%. Additionally, the S&P 500 saw a 0.3% increase, and the Nasdaq Composite (COMP) recorded a gain of 0.9%, according to FactSet data.
