What Happens After a Historically Weak Quarter for Stocks and Bonds

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Wednesday, July 6, 2022

A historically weak quarter, six months, and year for stocks, bonds, and the two combined is now behind us. With stocks and bonds both showing weakness, not surprisingly a 60/40 balanced portfolio that combines the two has also shown weakness. As shown in the LPL Chart of the Day, since 1976 (the inception of the Bloomberg U.S. Aggregate Bond Index), the second quarter of 2022 was the fifth worst for the S&P 500 Index (“S&P 500”), the fourth weakest for the Bloomberg U.S. Aggregate Bond Index (“Agg”), but the worst quarter for a combination of the two, using a mix of 60% of the S&P 500 and 40% the Agg.

“This has been a very tough quarter for a 60/40 portfolio of stocks and bonds,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “In fact it’s the worst on record. But better times may be ahead. Following the nine other worst quarters that round out the bottom 10, eight were higher a year later, with an average return over 17%, which is a very solid year for a 60/40.”

View enlarged chart. 

Some things to know about the most recent quarter:

  • Of the 10 worst quarters for a 60/40 portfolio, every other one was driven mostly by S&P 500 losses. The third quarter of 1981 was the only other quarter in the bottom 10 that saw both stocks and bonds decline.
  • Q1 and Q2 2022 combined was the second worst two-quarter period for a 60/40 portfolio.
  • The four quarters ending Q2 2022 was the second worst four-quarter period for a 60/40 portfolio even though it does not appear among the 10 worst for the S&P 500 alone. It was, however, the worst four quarters for the Agg since its inception.
  • The nine other worst four-quarter periods for the Agg saw an average gain of almost 11% over the next year. With yields still historically low we wouldn’t expect that kind of return now, but it does signal the potential for future gains.
  • This is the second consecutive quarterly loss for a 60/40 portfolio. That has happened nine times in the past. The average return over the next quarter was 5.0%. The streak ended at two quarters seven times and extended to a third quarter twice.

We remain in a turbulent period for markets and the economy. While we don’t believe anything more than a mild recession is priced into the S&P 500 and see potential for more volatility, we think the S&P 500 still has the potential to see solid gains from here by year end, driven by earnings and some multiple expansion as inflation potentially starts to settle down. Bond returns will depend, in part, on how aggressive the Fed needs to be, but weak four-quarter periods (and this is the weakest on record for the Agg) tend to be followed by greater stability.


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