The Tell: Traditional 60/40 investing strategy books best start to a year since 1991: BofA Global


The traditional investment portfolio allocation of 60% to stocks and 40% to bonds is off to the best start to a year in more than 30 years after collapsing in 2022, according to BofA Global Research.

The standard 60/40 portfolio has gained 6.8% so far this year, said analysts at BofA Global Research, citing EPFR Global data in a weekly note. The allocation is getting off to the strongest start to a year since 1991, after delivering one of its worst years in history (see chart below).


See: Bond investing 101: What to know as the Fed sticks to its inflation fight

The 60/40 portfolio has long been revered as a trusty guidepost for investors with a moderate risk tolerance. By holding 60% of their portfolios in equities and 40% in bonds, investors could have the best of both worlds: historically, the position in bonds could provide some cushion for investors when the stock market takes a hit.

But this strategy didn’t pack the same punch in 2022 as the Federal Reserve’s tight stance of monetary policy in an effort to tame the highest inflation in decades battered both the stock and bond markets, providing strong headwinds to the rules of thumb in investing. 

BofA said in October that rather than producing its 9% average return, the 60/40 strategy delivered a minus 30% return in the first ten months of 2022, marking its worst stretch since the aftermath of the Great Depression in 1929. 

The Bloomberg U.S. Aggregate Bond Index, the broadest domestic measure of the core fixed-income market and which includes Treasurys, agency mortgage-backed securities and investment-grade corporate debt, booked a 13% loss in 2022.

Meanwhile, all three major benchmarks in the stock market suffered their worst year since 2008. The Dow Jones Industrial Average DJIA, +0.50% dropped 8.8%, while the S&P 500 SPX, +0.22% tumbled 19.4% and the technology-heavy Nasdaq Composite COMP, -0.61% plunged 33.1%.

See: Traditional 60/40 strategy may start to work again for investors, but ‘tightening cycles can be scary,’ Goldman exec says

However, both U.S. equities and bonds have rallied in 2023, with investors increasingly confident the Federal Reserve will “pivot” away from its restrictive policy stance in the near future and may even cut interest rates by the end of this year.

The BofA data showed bonds saw inflows for the past six weeks. “We believe bonds will have a tough decade but they will post positive returns in 2023,” said Michael Hartnett, chief investment strategist at BofA Global Research. “What’s the best thing about stocks in 2023? Bonds.”

The yield on the 2-year Treasury note TMUBMUSD02Y, 4.532% was at 4.511% on Friday afternoon, climbing from 4.507% on Thursday, a level that marked the yield’s highest finish since Nov. 22, according to Dow Jones Market Data. The 10-year Treasury note yield TMUBMUSD10Y, 3.748% rose 6.1 basis points to 3.743% from 3.682% Thursday.  

See: Top Wall St. economist says ‘no landing’ scenario could trigger another tech-led stock-market selloff

In the meantime, the U.S. stock market has been generally upbeat but extremely volatile in 2023 as noisy economic data generates lingering concerns about the state of the economy. The S&P 500 gained 6.5% this year, while the Dow industrials advanced 2.2% and the Nasdaq jumped 12%, thanks in part to robust tech earnings. 

Hartnett said it’s very “tempting” to see last Friday’s “blockbuster” January nonfarm payroll data as indicating an economic slowdown can be avoided or at least delayed, but the January inflation report which is due out next Tuesday, will be “vital” to watch for clear directions on when the Fed will pivot in its monetary policy campaign.

U.S. stocks ended mostly higher on Friday with the Dow gaining 169 points, or 0.5%, to 33,869. The S&P 500 rose 0.2, to finish at 4,090, while the Nasdaq dropped nearly 71 points, or 0.6%. For the week, the large-cap index was off 1.1%, posting its worst week in nearly two months. The Dow industrials was off 0.2% and the Nasdaq slumped 2.4%.

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