60/40 portfolios soar in 2019. Are lower returns ahead?
Traditional stock and bond portfolios are soaring, but the return drivers seem to be running out of steam. Our chart explains what this could mean for investors in 2020.
December 13, 2019 | 1 minute read
A powerful combination of macro factors has come together to push stocks and bonds toward strong YTD total returns.
Stocks have risen more than 28% YTD, boosted by easy monetary policy combined with still-significant, though slowing, corporate stock buyback activity.1 Meanwhile, bonds have returned more than 8%, benefiting primarily from a peak-to-trough interest rate decline of approximately 120 bps.1
Against this backdrop, the traditional 60/40 portfolio – based on a 60% allocation to equities (growth) and 40% to traditional bonds (income) – has seen a 20% YTD return, stronger than any full calendar year since 2000.2
While 2019 has been a banner year for the 60/40, it could be a tough act to follow. Bond prices are unlikely to benefit from further interest rate declines next year as significant as this year’s. Furthermore, stocks could be hampered by a more challenging earnings picture going forward as the past three quarters have already seen annualized earnings declines.
Investors may be well served by preparing for heightened volatility and a more challenging return environment across traditional asset classes in 2020. Volatility could be fueled by uncertainty surrounding the upcoming presidential elections, a deeper corporate earnings slump coupled with high equity valuations, or any number of yet-unknown geopolitical risks.