Before the pandemic hit in 2020, a decade-long bull run in the stock market saw the 60/40 portfolio slowly fall out of favor. With market volatility returning, that 60/40 split appears to be making a comeback.
The first week of August saw heavy volatility sparked by a sell-off that roiled the major stock market indexes. This brought bonds back into the fold as a safe haven asset in addition to the attractive yields.
Before the August volatility, investors have been adding bonds before rate cuts to lock in yields before they subsequently fall. With bond prices getting pushed down amid aggressive rate hikes the past few years, the prospect of price appreciation is now taking over.
Additionally, more volatility could be ahead as a presidential election looms. The Cboe Volatility Index (VIX) is up over 25% in the past month thanks to the Aug. 5 sell-off.
“During the stock market selloff that rocked portfolios for the first week of August, high-quality bonds returned to form and delivered the type of defense investors had grown accustomed to before the nearly four-year-long bond bear market,” Morningstar noted. “It was a short stress period, but the results are encouraging for investors who have stuck with the 60/40 portfolio through its recent diversification struggles.”
As mentioned, investors are also adding bonds for the potential bullish run in bond prices ahead of Fed rate cuts. Add to that the renewed recession fears and it makes for heavy tailwinds behind bond prices.
“The Morningstar US Core Bond Index rose 1.5% during the period as a flight to safety and the hope that the US Federal Reserve will cut interest rates this year boosted those bonds,” Morningstar added.
