The recent synchronized selloff in equities and Treasuries was likely just the beginning of what's to come for the popular 60/40 stock-bond portfolio strategy, a growing chorus of Wall Street strategists warn.
Bank of America Corp. called it "the end to 60/40" while Goldman Sachs Group Inc. said losses from such portfolios could swell to 10%. Similar alarms also rang at Deutsche Bank AG, where strategists including Jim Reid said a shift in the stock-bond relationship may force money managers to adjust their thinking.
Underpinning all these warnings is an economy that's now facing mounting inflationary pressures after spending years warding off the threat of deflation. During the last two decades, subdued growth boosted the allure of the 60/40 strategy, one that's built on a negative stock/bond correlation where one serves as buffers for the other.
Now, with inflation fears raging, the worry is the Federal Reserve will seek to slow down the economy and rising rates will spell trouble for both bonds and stocks. September offered a taste of the pain, with a Bloomberg model tracking a portfolio of 60% stocks and 40% fixed-income securities suffering the worst monthly drop since the pandemic started in early 2020.
"Obviously for this relationship to reverse we need to be in a sustainably higher inflation era," Reid wrote in a client note. "There is every chance we are in one and if so a lot of the relationships that have prevailed in the average person's investment career could change."
The stakes are high. A sustained shift in the bond-stock relationship would unsettle trillions of dollars that are managed at risk parity funds, balanced mutual funds, and pension funds that follow the framework of 60/40 asset allocation.
To be sure, the death of "60/40" has been pronounced before, only to be proved wrong or at least premature. Bloomberg's model has climbed all but one year since the 2008 global financial crisis. Despite the recent market turmoil, it's also up 9%.
