Aggressive monetary policy tightening over the course of 2022 aimed at curbing elevated inflation resulted in subdued returns across equities and bond markets, dampening appetite among investors.
This prompted some observers to sound the death knell for 60/40 balanced portfolio investments.
“Last year’s high inflation and rising interest rates led to increased correlations between stocks and bonds as both fell in unison, leaving bonds unable to fulfill their typical role of providing ballast, particularly during risk-off periods,” global asset manager T. Rowe Price observed in a new analysis.
But the turn of the year has seen a return to confidence in the asset classes amid signs of an easing in inflationary pressures and a subsequent slowdown in interest rate tightening.
A recent analysis from Bank of America revealed the 60/40 portfolio has risen 6.5% since the turn of the year following record falls in 2022.
According to T. Rowe Price, the 60/40 portfolio is alive and well.
“Despite correlations between stocks and bonds remaining elevated, noise around the death of the 60/40 portfolio has been silenced as strong returns in both stocks and bonds have led to a more than 5% return for the 60/40 in just the first month of the year,” the group noted.
“The rally in both asset classes has been supported by evidence of falling inflation and lower rates. Our analysis has shown that, in historical periods like today when inflation is declining from elevated levels, correlation between stocks and bonds can remain elevated.
“While perhaps still not providing diversification, if the disinflationary trend continues, the two asset classes could perform well, bringing back the 60/40 portfolio from one of its worst years ever.”
AMP Capital chief economist Shane Oliver agreed, adding death declarations for 60/40 portfolios were “premature and almost ridiculous”.
He noted correlations between the two asset classes were not unprecedented.
“You just have to go to the 1970s in particular, to see that there was a positive correlation between the two,” Mr Oliver told InvestorDaily.
“And in fact, through much of the 80s and 90s, as inflation came down, there was a positive correlation because they both rallied at the same time, but no one worried about that, because they were both positive.”
