It's time to bring back the 60/40 portfolio
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It's time to revisit the 60/40 investment strategy – allocating 60% of your portfolio to stocks and 40% to bonds – before the Federal Reserve potentially cuts rates, says George Catrambone, head of fixed income at DWS Americas.
Why it matters: As stocks and bonds have become increasingly correlated amid several economic head fakes, Catrambone argues that the bond market is on track to become a great portfolio diversifier again.
What they're saying: Investors have "short memories" and forgot "what that April move felt like" when stocks nearly slipped into a bear market, Catrambone tells Axios.
- Fixed income can start "finding its way back into a normal investment allocation" for investors who wished they owned bonds amid that market volatility.
Be smart: If the Fed cuts rates in September because the economy is weakening, now is the time to buy longer duration bonds, Catrambone says.
- That's because as rates come down, historically, yields will go down as well.
- Investors want to lock in higher yields now before they drop.
- The 10-year-Treasury yield, for example, is sitting at about 4.27% today, but Morgan Stanley sees it dropping to below 4% this year as the Fed is expected to cut rates.
Catch up quick: Longer-duration notes and bonds, like the 10-year, have fallen out of favor with the fixed-income crowd on Wall Street.
- Consensus has been to own the belly of the curve – bonds that are not too short-term, not too long-dated – as it's been unclear where the economy is heading and what the Fed's response will be.
- A rate cut could reignite interest in longer-dated bonds.
Yes, but: If the Fed cuts short-term rates amid rising inflation, that could drive yields higher on the longer end of the curve, making duration a less attractive option for investors right now.
- That's what played out in the bond market the last time the Fed cut rates, only to pause it's cutting cycle at the very next meeting, thanks to sticky inflation.
The bottom line: The top 10 stocks in the S&P 500 currently make up about 40% of the index's market cap.
- Diversifying amid an equity market that top-heavy is a "great setup for bonds," Catrambone says.
