Stocks and Bonds Are Falling in Lockstep at Pace Unseen in Decades

This is the latest dilemma for investors who are having trouble managing The financial market fluctuates greatly globally. This year’s drop has dealt a blow to the 60/40 portfolio model — a combination of 60% stocks and 40% bonds that has long been touted as providing strong returns and hedging against the infrequently expected drop for stocks, which are generally considered much riskier than bonds.

That fence has evaporated this year. Investors dumped both stocks and bonds as the Federal Reserve embarked on a campaign interest rate increase to fight inflation, that is at a 40-year high. Even the safest investments, Treasury, have plummeted.

Some investors are commodity market access, including John Cunnison, chief investment officer at Baker Boyer Bank, who increased bets on stocks tied to metals and natural resources. But concerns about commodity prices after a sharp rally driven by inflation concerns make it easier for others.

“There is no silver bullet,” Mr. Cunnison said. “Everywhere we can, we’re trying to find ways to diversify assets.”

Roadmap on the bond market Falling deeper this week, with 10-year Treasury yields touching 3% for the first time since 2018. Some investors warn it’s still early – and bond prices could continue to fall . In Fed’s last rate hike cycle—End December 2018 — Treasury yields didn’t touch 3% through the end of that year, near the end of the cycle.

The Fed is ready on Wednesday to raise rates by half a percentage point, which would mark increased that intensity for the first time in 22 years. Investors are expecting more rate hikes to come: Interest rate derivatives show investors expect the Fed to raise its benchmark federal funds rate above 3% next year, from the current level is between 0.25% and 0.5%.

Mr. Cunnison said he has cut his exposure to bonds that mature much later and are more sensitive to interest rates. The rally in commodity prices this year – from oil to soybeans and oats – has raised concerns about inflation and skepticism about how the Fed can tame it without pushing the economy into recession.

High inflation also makes some investors reluctant to pour more money into bonds despite the turmoil in the stock market. Inflation can reduce the purchasing power of the fixed payments that bonds provide. As a result, some investors say they’ll stick to the stock until volatility hits.

The S&P 500 just ended its worst month since March 2020, while many Tech stocks hit harder. The Nasdaq Composite is down nearly 20% this year, and shares of many of the tech heavyweights that have driven the market higher in recent years are posting double-digit losses.

“There have been a lot of days when I open my Bloomberg screen and everything is red and I have to squint,” said Josh Kutin, head of asset allocation for North America at Columbia Threadneedle Investments. to see what the green number is. oversees about $90 billion in assets.

Mr. Kutin said he is still holding more stocks than the benchmark he tracks, because he expects high inflation to continue to affect bond prices. He said investments in corners of the market such as commodities have helped protect some of the company’s portfolio.

Some individual investors, especially those who rely on their portfolio returns for income in retirement, have been burned by the recent volatility. Yet despite the chaos, US stock funds raked in about $81 billion in assets this year through the end of April, according to data from EPFR. Bond funds and money markets have lost more than $240 billion in total.

Fred Wallace, a 67-year-old retiree living in Los Angeles, said he has sold some of his bonds and now keeps more of his portfolio in cash and stocks. He is discounting bonds.

“I have maintained a fairly solid equity position that has spread northward over the past few years,” said Mr. Wallace.

His allocation to stocks has recently increased to about 70%, up from about 65% at the end of 2020. He is poised to weather the volatility.

“I believe the market will always come back,” he said.

However, some investors say it is not wise to invest in bonds, despite the large losses this year.

The Fed’s outlook on interest rates can change rapidly as the economy evolves. It is not yet clear how the rate of increase will emerge through the job market and affect consumer spending. It seems that some Americans are raising prices that are more sensitive to big-ticket items. And new data last week showed that the economy contracted last quarter for the first time since the pandemic broke out.

That will have an impact on the bond market, said Anna Rathbun, chief investment officer at CBIZ Investment Advisory Services, based in Cleveland.

“I am not going to give up a fixed income,” Ms. Rathbun said. “Anything that goes straight up, sometimes goes down,” she said, noting that yields will rise sharply this year due to falling bond prices.

Write to Gunjan Banerji at [email protected]