Published on 19 Jan 2022 on Market Watch

The 60/40 portfolio 'is in danger' as Federal Reserve gears up for a rate-hike cycle in coming...

Article preview image

An earlier version of this article misstated the average annual return of a 60%/40% portfolio mix. The article has been corrected.

The traditional portfolio mix of 60% stocks and 40% bonds, historically seen as the safest allocation for investors of moderate-risk tolerance, “is in danger” as the Federal Reserve gears up for its first interest rate hike campaign since 2015-2018, according to JPMorgan Chase & Co. analysts.Treasurys, hammered by the prospect of rate hikes in coming months, are off to their worst start to a new year in the past three or four decades, based on Dow Jones Market Data. The aggressive selloff in bonds has pushed yields to two-year highs this week, which is exacting a toll on stocks. All three major stock indexes are down for 2022 — with the tech-heavy Nasdaq Composite taking the biggest hit, falling more than 7%.The broad-based selloff of both asset classes in 2022 has led to a year-to-date loss of 3.2%, as Tuesday, in portfolios made up of 60% in the S&P 500 index and 40% in investment-grade bonds, including Treasurys. That’s a turnabout from the past, when bonds would act as a hedge against stock-market declines, rising in price and demand as investors flocked to safe havens during equity selloffs. The 60/40 mix has generated a historical average annual return of 9.1% from 1926 to 2020, according to “The market’s biggest worries seem to now be revolving around the Fed and the implications of rising rates,” JPMorgan strategist Thomas Salopek and others wrote in a note released Wednesday. In their view, there’s still “a substantial catch-up that needs to happen in rates markets.” Moreover, the market’s expectations for where the Fed’s rate-hike cycle ultimately ends up “have room to rise further.” Futures markets are currently pricing in an almost 92% chance of a 25-basis-point hike in March, but also reflect a 5.4% likelihood the hike could turn out to be a 50-basis-point move, which would lift the fed-funds rate target to 0.5% to 0.75% from a current level of zero to 0.25%, based on the . By year-end, traders see a slight risk that the Fed’s policy-rate target could get to as high as 1.75% to 2% or even 2% to 2.25%.That’s significant because Treasury yields, which partially reflect expectations for U.S. interest rates, would likely need to continue rising from current levels — which would have multiple knock-on effects. Beyond making the cost of borrowing more expensive on everything from mortgages to auto and student loans, higher yields also trigger selling pressure for technology and other growth stocks, as investors discount expectations for future cash flow far into the future.

NASDAQ.FWONA price evolution
NYSE.FLOW price evolution

Want to become a better investor?

Start tracking your investments with Statfolio

Sign up for free
Related News
Dow, S&P 500 and Nasdaq end lower for 2nd straight session as investors brace for big earnings week

All three major stock indexes ended with small losses in a choppy trading session on Monday as ea...

MarketWatch 18 Apr 2022

Inflation is raging, but these 16 companies have pricing power

Decades of deflationary forces that helped feed booming prices for U.S. stocks are over, at least...

MarketWatch 14 Apr 2022

Delta Air’s profitable March and upbeat guidance boost airline stocks

A quarterly beat for Delta Air Lines Inc. coupled with the airline’s higher guidance and news tha...

MarketWatch 13 Apr 2022

Delta Air's profitable March and upbeat guidance boost airline stocks

A quarterly beat for Delta Air Lines Inc. coupled with the airline’s higher guidance and news tha...

Market Watch 13 Apr 2022

U.S. stocks end lower in choppy session after data shows inflation running hottest since 1981

U.S. stocks ended modestly lower Tuesday, erasing earlier gains, as investors questioned whether ...

MarketWatch 12 Apr 2022

Three value stocks that can provide safety as interest rates rise

Stocks have been on a rocky road this year, as investors have tried to anticipate every possible ...

Market Watch 12 Apr 2022

Dow falls more than 400 points, Nasdaq finishes 2.2% lower as Treasury yields keep surging

Dow industrials and the S&P 500 index book their biggest one-day declines since March on Monday, ...

MarketWatch 11 Apr 2022

Gogo: After a 47% Rally YTD, Will the Stock Continue to Rally?

Gogo Inc. (GOGO) in Chicago, provides broadband connectivity services to the aviation industry in...

Entrpreneur 11 Apr 2022

20 high-volatility stocks you might want to avoid in a hair-trigger market

Many technology stocks have gotten crushed in the high-inflation, rising-interest-rate environmen...

MarketWatch 11 Apr 2022

SPX Flow CEO's pay package soared to $7.1M as he led company to Lone Star deal

It is the largest total compensation package Marc Michael has received since he became CEO of SPX...

American City Business Journals 5 Apr 2022