Looking at history, a 60/40 equity and bond portfolio strategy is often a solid option for investors with moderate risk appetite, but as the risk of stagflation in Europe and the U.S. increases, Wall Street strategists warn that This diversification strategy may face a “lost decade”.
The 60/40 strategy is an asset allocation strategy that puts 60% of assets in stocks and 40% in bonds. The goal is to balance risk and reward by taking advantage of the negative correlation between stock and bond price movements.
According to portfolio strategists at Goldman Sachs including Christian Mueller-Glissmann,The lost decade is defined as a period of subdued real returnsGoldman Sachs reported that since the beginning of the year, the return on investment of the 60/40 strategy in Europe and the United States has fallen by more than 10%.
The Russian-Ukrainian conflict is exacerbating slowing growth and inflation risks, with implications for investors.So far this year, the three major U.S. stock indexes have fallen between 5% and 10%.Nasdaq Composite IndexThe biggest decline, the bond market is also struggling, the 10-year U.S. Treasury bond had its worst performance since 2013 from the beginning of the year to Thursday (17th) resistance.
In fact, concerns regarding stagnant inflation have been clearly reflected in interest rate markets.
Goldman Sachs said the 10-year US breakeven inflation rate, which measures inflation expectations, has reached the highest level since the 1990s, but the real yield adjusted for inflation remains close to decades. The low point reflects the market’s pessimistic expectations that economic growth will slow in the next few years, and the yield spread between 2-year and 10-year U.S. Treasury yields is also close to inversion, raising fears of a recession.
John Silvia, CEO of Dynamic Economic Strategy, said: “The overarching problem with a 60/40 portfolio is that higher inflation means bond real returns are in negative territory, and if slower economic growth weighs on earnings, this means equity assets It will also take a hit, so portfolio performance is likely to be more disappointing than it has been in years past, and it might last a full decade.”
Silvia explained that the reason for the decline of the 60/40 portfolio strategy has to do with the ultra-low interest rates in the past four to five years, and people’s search for profits, which has led to all kinds of speculation in the market.
The Goldman Sachs team of strategists said the Lost Decade was more common than many thought, having occurred in World War I, World War II and the 1970s, and stagnant inflation would increase the odds of a Lost Decade.
Goldman Sachs suggested that investors can reduce risk by allocating assets to real assets such as commodities, real estate or infrastructure, or overseas markets. Value stocks, high-yield stocks and convertible bonds are also options worth considering.
However, not everyone agrees with this view. JPMorgan strategist Thomas Salopek believes that while the 60/40 strategy is currently at risk of failure, he believes the U.S. will not fall into stagnant inflation and the lost decade will not happen.
Salopek explained that the market is still in a state of high economic growth and high inflation, with yields soaring as the Fed enters a rate hike cycle, but as risk aversion fades, healthy stock and bond premiums Returning, so once risk appetite recovers, a good performance in equities should help make up for the weakness in bonds.
