The first six months of 2022 were challenging for investors, even those with diversified portfolios of stocks and bonds.<\/p>\n\n\n\n
Indeed, one of the most significant \u2018issues\u2019 with 2022\u2019s market drawdown has been the atypically tight correlation between stocks and bonds. Consider that in the first six months, an investor with an all-equity portfolio likely performed in-line with someone invested in a 60% stock\/40% bond portfolio.1<\/sup> In the first four months of the new year, long-term U.S. Treasury bonds were off -18% while the stock market dipped into bear market territory. That\u2019s not supposed to happen.<\/p>\n\n\n\n One of the key benefits of a balanced asset allocation of stocks and bonds is to limit downside volatility during sharp equity market pullbacks, and so far in 2022, bonds have failed to deliver. The breakdown in this relationship between stocks and bonds has some investors wondering if bonds are no longer a reliable hedge for stocks.<\/p>\n\n\n\n But I don\u2019t see the first six months of 2022 as an indication for how the relationship between stocks and bonds will play out moving forward. Investors should also recognize that throughout history, there have been several periods \u2013 sometimes long ones \u2013 where bonds and stocks were positively correlated. Those periods also happened to be ones where there was high inflation uncertainty, i.e., the 1970s and 1980s.<\/p>\n\n\n\n For most of history, however, bonds have been effective at mitigating equity market risk, and they have also helped portfolios generate positive returns during periods when equities sold off sharply. During the past 20 years, for instance, there has been a consistently negative correlation between stocks and bonds, with basically the only exception being 2013\u2019s \u201ctaper tantrum\u201d when both declined in lockstep.2<\/sup><\/p>\n\n\n\n As readers can see in the table below, long-duration U.S. Treasury bonds have held up remarkably well \u2013 and almost always delivered positive performance \u2013 during the biggest equity market drawdowns. 2022 is arguably the exception, not the rule.<\/p>\n\n\n\n Source: Morningstar, UBS3<\/sup><\/em><\/strong><\/p>\n\n\n\n Some have argued that an inflation rate of 2.5% is the point at which stocks and bonds flip in correlation from positive to negative or vice versa. During high inflation regimes, bonds suffer as coupon payments become less valuable and as investors demand higher yields, and stocks suffer from lower expected growth rates and cost pressures. High inflation can thus hurt both asset classes.<\/p>\n\n\n\n Expectations for higher-than-average inflation does not mean it\u2019s time to abandon bonds in an investment portfolio, however. The fixed income portion of a portfolio can still serve the purpose of generating cash flows and mitigating equity volatility risk, especially when the bonds in a portfolio are actively managed as we do here at Zacks Investment Management.<\/p>\n\n\n\n For the past couple of years, we have held a fairly cautious stance on fixed income as we anticipated rising rates, and with the Fed likely remaining hawkish for the rest of the year, we have decided to keep duration on the shorter end while focusing on higher credit quality bonds. This type of active management is needed, in my view, to navigate the changing market environment but also to ensure a fixed income allocation is serving its purpose.<\/p>\n\n\n\n Bottom Line for Investors<\/strong><\/p>\n\n\n\n The first six months of 2022 were a rocky stretch, no matter how investors were positioned. Seeing stocks and bonds move in lockstep downward was a break from what we\u2019ve experienced in the last two decades, when the two asset classes were consistently negative in correlation.<\/p>\n\n\n\n Looking ahead, it is possible that a positive correlation between stocks and bonds could persist in a high inflation regime, which I think argues for the type of active management in fixed income we do here at Zacks Investment Management.<\/p>\n","protected":false},"excerpt":{"rendered":" Investors historically have relied on bonds to limit downside volatility during equity pullbacks. That hasn’t happened this year. <\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9229","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9229","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9229"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9229\/revisions"}],"predecessor-version":[{"id":9231,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9229\/revisions\/9231"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9229"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9229"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9229"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Period<\/td> Cumulative Stock Market Return (S&P 500)<\/td> Cumulative Long-Duration US Treasury Bond Return<\/td><\/tr> November 2007 \u2013 February 2009<\/td> -50.9%<\/td> +16.0%<\/td><\/tr> August 2002 \u2013 September 2002<\/td> -44.7%<\/td> +28.5%<\/td><\/tr> December 1972 \u2013 September 1974<\/td> -42.6%<\/td> -6.0%<\/td><\/tr> September 1987 \u2013 November 1987<\/td> -29.6%<\/td> +2.7%<\/td><\/tr> December 1986 \u2013 June 1970<\/td> -29.3%<\/td> -8.0%<\/td><\/tr> January 1962 \u2013 June 1962<\/td> -22.3%<\/td> +4.0%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n