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.”
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.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.