4 min read

Things Fall Apart

The breakdown in the traditional stocks/bonds correlation has made the first half of this year rather unsettling for conventional 60/40 investment portfolios, where investments are split 60% in stocks and 40% in bonds:

Charlie Bilello

The classic 60/40 portfolio has taken a beating this year as both asset classes have tanked.

In the first six months, it took its deepest first-half dive since 1988.


And last quarter was worse than in the depths of the global financial crisis and during the pandemic rout.


Whether bonds will still work as a hedge against stocks is an ongoing debate.

And as usual there are boffins on either side of the argument...

Goldman Sachs thinks Treasuries remain dead as a hedge as central bankers tighten monetary policy.

JPMorgan Asset Management reckon yields at multi-year highs will help bonds flourish in the next crash.

Another guessing game, then.

In general, stock and bond market returns tend to have opposite exposures to economic growth news, but directionally similar exposures to inflation news.

In other words, the correlation is pushed negative when there is more growth news (or uncertainty), and pushed more positive when there is more inflation news (or uncertainty).

As it looks, a more prolonged positive stock/bond correlation would probably require a rise in longer-term inflation uncertainty, along with monetary policy errors.

This remains a very real risk.

Only four times over one century, annual performances of both stocks and bonds were negative: 1931, 1941, 1969 and this year (2022 YTD).

So What?

Bonds are boring anyway. And in any case, what has happened this year shows that you need to be diversified, perhaps come up with new ways to protect your portfolio and stop relying only on bonds.

I talked about some ways you can do that here and here.

Demand for alternative investments is set to grow by up to 46% over the next 12-months.

Other ways include investing in commodities (which has proven its worth this year), and seeking dynamic strategies such as long/short equity and trend following.

If you want to be more of a snob than investing in fine art, another low-profile alternative is worth mentioning. Fine wine.

Higher demand and limited supply of fine wine have helped generate impressive returns in the last couple of decades. Just look at the Liv-ex 1000 industry benchmark which tracks 1000 of the most traded wines across the world. Its value has risen by 26% in the last year alone, beating the S&P 500 by almost 40%.


I would not suggest an aggressive deallocation from bonds, but rather (if this positive correlation really worries you), a focus on increasing the size and diversifying power of the alternatives allocation.

A final thought...

It doesn't make sense (at least not now) to have a 60/40 portfolio that is only exposed to the U.S.

Sure, the U.S. stock market has long been considered the source of the greatest returns for investors, outperforming all other types of financial securities over the past century or so.

But the world has changed. Investing has and will continue to change. Cryptos were not around before. China wasn't that powerful. The democratisation of traditionally unreachable asset classes has never been so pronounced.

+ The Many Reasons ESG Is a Loser [WSJ]. "1) ESG funds have underperformed; 2) companies that tout their ESG credentials have worse compliance records for labor and environmental rules; 3) ESG scores of companies that signed the U.N. Principles of Investment didn’t improve after they signed, and financial returns were lower for those that signed; and my favorite point, 4) Companies publicly embrace ESG as a cover for poor business performance." See also How to make sustainable investing work [FT].

I have always believed, rather than avoiding bad apples, actually seeking to apply positive benefit can make ESG work. Impact investing is the only way forward and should be the future of all ESG investing. Away with the BS marketing ploy.

+ Active Funds Are on Top Again. It Took a Bear Market to Put Them There [Barron's]. "After more than a decade of chronic underperformance, more actively managed stock mutual funds and exchange-traded funds have been beating their passive peers at a steadily rising rate during the stock market’s selloff this year. Just over half of U.S. stock funds outperformed the average passive portfolio through May, compared with 45% in 2021. Nevertheless, it’s too soon for managers to wash down years of humble pie with Champagne."

The jury is still out whether active will continue to outperform. They've absolutely been blessed with crap market conditions. Over the long term, many active managers will continue to have a hard time sustaining outperformance. They will either close down or be unable to keep up through different market cycles. The real test will come in the next bull run.

Sources of Interest đź’ˇ


Western countries will like these estimates. Despite being a democratic mess in recent years, India is still the world's largest democracy. This probably won't be much of a counterweight to China's influence in the region though, or the world for that matter. Antony Blinken was right when he said that China is the only [other] country in the world with the intent to reshape the international order, and increasingly the economic, military, diplomatic and technological power to do it. India isn't even close.

+ A Plane of Monkeys, a Pandemic, and a Botched Deal: Inside the Science Crisis You’ve Never Heard Of [Mother Jones]. "Experts say there’s a dire shortage of primates for biomedical research—and it’s putting human lives at risk."

+ If you've got this far and want more sources of interest, this will keep you occupied: An interactive history of the world, as told through Wikipedia articles. [Histography]. View on a computer.