Quarterly returns on the 60/40 portfolio
Source: Bloomberg Finance, L.P., FS Investments, as of March 31, 2022. 60/40 portfolio refers to 60% stocks (S&P 500 Index) and 40% bonds (Bloomberg U.S. Aggregate Index).
- Traditional markets have seemingly been hit from all sides recently as the Fed begins what is expected to be its most aggressive policy tightening in decades, inflation sits at multi-decade highs, fiscal support is waning, and Russia’s invasion of Ukraine shows no sign of easing.
- Against this backdrop, the traditional 60/40 portfolio, long the backbone of many retail investor portfolios, just completed its worst quarter since the onset of the pandemic in 2020.
- As the chart shows, it is not entirely uncommon for the 60/40 to decline. However, the degree of macro uncertainty today could cast clouds on traditional markets through the coming quarters. Prior to the pandemic, the last time the 60/40 portfolio fell was in Q4 2018, shortly after the Fed embarked on quantitative tightening, which resulted in extreme market volatility and a quick change in course by the Fed.
- As has been well documented, core fixed income remains in a very difficult position as duration-sensitive assets have seen notable selloffs as rates spiked in March. For its part, the S&P 500 saw the sharpest ever-decline in valuations before the Fed began its hiking cycle in March but has seen a modest uptick since.
- Despite the significant challenges stocks and bonds face in today’s environment, opportunities remain in areas of both. To find such opportunities, however, investors may be wise to adopt a more selective approach outside of traditional benchmarks as they seek alternative ways to generate returns and manage risk.
