The recent synchronized selloff in stocks and bonds has crushed one of the most popular strategies for long-term investors: the 60/40 portfolio.
According to data from strategists at Bank of America Global Research published last week, the 60/40 portfolio – a mix of 60% stocks and 40% bonds – fell 19.4% year-to-date through the end of August, to on track for the worst year since 1936.
Through the end of August, the S&P 500 was down more than 16% year-to-date, while long-term bonds were down more than 20% and investment-grade corporate credit was down 13%.
Stocks struggled to start September on a positive note last week, with the three major averages retreating ahead of the weekend. The August jobs report released on Friday did not allay investor fears of continued aggressive rate hikes by the Federal Reserve later this month.
And after rallying from mid-June lows to mid-August highs, the S&P 500 has erased about half of its ~17% gain over that period, a sign to the BofA team that this was just a “typical bear market rally”. Including last week’s losses, the S&P 500 is down about 17.6% so far this year.
“The 17% rally from the June lows appears to have been just a typical bear market rally, averaging 1.5 times per bear market,” BofA wrote. “Our bull market signs continue to show no real signs of abating.”
In mid-July, Bank of America cut its year-end S&P 500 target to 3,600 from 4,500 and called for a “mild recession” to hit the US economy in 2022.
“September was a seasonally weak month (second weakest average return +0.1% & hit rate 56%) and we expect more pain in the market with our year-end forecast of 3,600,” the firm added.
The poor performance of the 60/40 portfolio this year shows that the challenges for investors have not only come to the stock market but also to the bond market. Although market history tells us that it is maybe not such a unique circumstance as it might otherwise seem.
“Brief, simultaneous declines in stocks and bonds are not unusual, as our chart shows,” Vanguard’s chief Americas economist Roger Aliaga-Díaz wrote in a note this summer.
“The nominal total returns of both U.S. stocks and investment-grade bonds, shown monthly since early 1976, have been negative nearly 15% of the time. That’s one month of joint declines about every seven months, on average,” wrote Aliaga-Díaz. .
“Extend the time horizon, however, and joint declines have occurred less frequently. Over the past 46 years, investors have never experienced a three-year period of losses in both asset classes.”
As Aliaga-Díaz noted, the goal of a 60/40 portfolio allocation between stocks and bonds is to achieve annualized returns of around 7% on average. But an average annual return of 7% does not mean that most years will return 7% most years.
Data from JPMorgan Asset Management, for example, shows that while the S&P 500’s average annual return since 1980 is just over 9%, the index has gained 9% in a year only once during that time.
And for 60/40 investors, recent history offers an example of how this average return can play out over time.
“Over the previous three years (2019–2021), a 60/40 portfolio returned 14.3% annualized, so losses of up to -12% for all of 2022 would just bring the four-year annualized return to 7%, back by historical standards,” Aliaga-Díaz wrote.
“This is not the first time that 60/40 and the markets in general have been in trouble — and it won’t be the last,” Aliaga-Díaz wrote. “Our models suggest that there are further financial difficulties and that market returns will continue to be muted. But the 60/40 portfolio and its variants are not dead.”
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv
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