Stocks and bonds are rarely down at the same time
🎧💡 #11 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
What you’ll find in this episode:
2022 has been an anomaly, is it time for bond?
Keep high your attention with Portfolio volatility, could be crucial for the long term.
What can happen now?
Stocks and bonds are down and is clear that we are in an anomaly year, so I agree with Charles Schwab when say that is very unlikely to see the same thing happen the next year.
High inflation could result in more rate hikes than initially expected. The Fed does not want to risk inflation becoming entrenched.
With an upper bound of 4%, the Fed's policy rate should now be considered restrictive, and it should be followed by a period of below-trend economic growth.
This tightening cycle (as the above chart) that we are witnessing by the FED is very abnormally fast and each of us are asking what could happen right now.
There are plenty of reasons for the Fed to slow down the pace of hikes, like the recent inversion of the Treasury yield curve. When long-term yields drop below short-term yields, a recession tends to follow.
In this episode let’s see how bond markets are witnessing a brutal year and what we could expect forward looking.
And let’s repeat how the portfolio volatility could impact drastically your return in the long run.
Historically, bonds have provided a buffer when stocks fell. Since 1976, there have only been thirteen 12-month periods, or 2.4% of the time, where both stock and bond returns were negative.
When stocks have fallen, bonds have usually posted positive returns.
Is it time for bond?
It's been a brutal year for fixed income, but that's not a reason to avoid bonds going forward. This year has been an anomaly and is unlikely to repeat.
Going forward, returns should be better because starting yields are higher and it's unlikely that rates will continue to rise like they have.
Charles Schwab suggests investors consider extending duration to take advantage of the move up in yields and stay up in credit quality by focusing mostly on higher-rated bonds.
One of the benefits of high-quality bonds is that historically, their returns have not fluctuated as much as equities have.
This can help smooth diversified portfolio returns. For example, since 1976, the worst rolling 12-month total return for a portfolio of 30% bonds and 70% stocks was just over negative 30%.
For a portfolio with a higher allocation to bonds, 70% in this case, the return over that same period was negative 12%.
If you had like this piece and you want to read all the article I invite you to go on my website, there you can find a lot more useful insights.
Best regards,
🔔 If you like my work, one simple thing that would make me very happy is if you’d bring only two friends/colleagues within our community - they might appreciate it and after all…it’s free!
Feel free to share my contents with anyone you think is might be interested with the link below!
🔍 We are a community of Macro & Business enthusiasts and lovers of Financial Markets.
💡 If you want even more free, valuable financial content you can also follow me on Twitter and visit my Website for more in deep analysis.
Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.