The Resilience of a Time-Honored Investing Strategy: No Need to Panic

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A long-standing investment strategy is becoming less popular, yet investors are not prepared to abandon it just yet.

The 60-40 strategy, a widely favored investment approach, involves allocating 60% of a portfolio to stocks and the remaining 40% to bonds. It is touted as a reliable method of diversification, especially for individuals saving for retirement. The rationale behind this allocation is that an increase in bond investments can help mitigate losses during stock market downturns, and vice versa.

Conventional wisdom suggests that during times of fear, stock prices often decrease while bond prices rise as investors seek safer options. On the other hand, during periods of greed, riskier stocks tend to yield higher returns, making bonds that offer lower yields less appealing in comparison.

Both stocks and bonds plummeted last year due to the Federal Reserve's aggressive interest rate hikes aimed at curbing surging inflation. As interest rates rose, bond yields increased, decreasing the value of previously issued bonds with lower rates. Simultaneously, investors grew concerned that the abrupt rise in rates from near-zero levels could thrust the economy into a recession, causing stocks to slide.

Currently, Wall Street is grappling with the possibility of sustained higher interest rates, as the economy and job market show no signs of cooling down. This situation has caused yields to reach their highest levels in over ten years. When yields rise, bond prices fall, led by a sinking trend in Treasuries over the past few months. Furthermore, stocks have also experienced a significant decline from their 2023 gains. These circumstances resemble the perfect storm that caused the 60-40 portfolio to plummet in 2022.

According to data from Vanguard, the 60-40 portfolio experienced a significant decline of approximately 17% last year, marking its worst performance since 2008. However, this year, the portfolio has managed to maintain a modest return of around 6%. Many investors believe it is improbable that the same level of devastation witnessed last year will occur again.

Amy Arnott, a portfolio strategist at Morningstar, stated that despite the negative returns on bonds this year, it is likely that we have witnessed the worst of the impact. Last week, the 10-year Treasury yield surpassed 5%, reaching its highest point since 2007. This increase came after Federal Reserve Chair Jerome Powell emphasized in a speech that current monetary policy is not sufficiently restrictive to curb inflation and meet the central bank's target. Although the benchmark yield has since dropped below the significant 5% level, it still remains elevated.

Brian Henderson, the chief investment officer at BOK Financial, advises investors utilizing the 60-40 strategy to not forsake it entirely. However, he suggests contemplating an increase in their cash allocation in the short-term to capitalize on the remarkably lucrative interest rates. Henderson expresses his optimism, stating that the surge in bond yields will likely result in better performance for the 60-40 strategy.

Auto strike now the longest in 25 years

According to Chris Isidore, my colleague, the ongoing strike led by the United Auto Workers union against General Motors, Ford, and Stellantis marks the lengthiest auto strike in the United States in the past 25 years.

The union previously went on strike against GM in 2019, which lasted for 40 days. As of Wednesday, it has been 41 days since the strike began on September 15.

There are indications that the strike at Ford may be coming to a close, following the carmaker's agreement with the United Auto Workers on a tentative deal late Wednesday.

The strike is expected to persist at the remaining two companies as the Ford deal undergoes ratification. This marks the first instance of the union simultaneously striking all three automakers. However, rather than utilizing its full force right away, the union strategically carried out targeted strikes, selecting specific factories and facilities to disrupt company operations and increase pressure on the companies.

The strike is likely to go on for at least a few weeks longer.

Read more here.

Inflation is cooling, but the price hikes arent done

When the price of organic cotton and other raw materials surged in 2021, the family behind White Lotus Home, a sustainable bedding company based in New Jersey, chose to bear the brunt of the 20% to 25% increases, hoping that it was just a temporary fluctuation.

Earlier this month, Marlon Pando, the CEO of White Lotus Homes, sent an email to customers, informing them that due to financial constraints, the company would no longer be able to maintain the current prices. Consequently, prices are expected to rise in 2024. According to my colleague Alicia Wallace, inflation in the United States has noticeably decreased after reaching its highest levels in the past 40 years.

However, as inflation indicators, the activities of small businesses such as White Lotus Home, and the widespread price increases announced by major players like Chipotle and Disney demonstrate, the message reiterated by Federal Reserve Chair Jerome Powell and other experts remains unchanged: the journey towards disinflation will be turbulent.

Nevertheless, as time goes on, consumer tolerance, and in certain instances, their financial resources, are progressively dwindling.

Read more here.