Expertise

The 60/40 portfolio, defined here as a mix of 60% U.S. equities and 40% U.S. Treasury bonds¹, experienced a rollercoaster ride, dipping 17.5% in 2022 and rising 17.2% in 2023. Many market participants, perhaps fueled by a recency bias² belief that the declines of 2022 would persist, questioned the value of the traditional strategy. In our view, those concerns were overstated.

Since 2000, bonds often offered an effective hedge against equity-led losses. However, this dynamic dramatically changed in 2022 when both bonds and stocks produced negative returns, resulting in the worst performance of the 60/40 portfolio since 1937.

A unique set of circumstances led to the challenging 2022 macro conditions, and we had predicted that the 60/40 strategy would rebound. Two-hundred years of historical analysis suggests there is an 80% probability of positive returns in the two years following a year of negative returns for both stocks and bonds. Last year, stocks surged with the S&P, gaining 26.3%, and U.S. 10-year treasuries rose 3.6%. As a result, the 60/40 mix returned 17.2%, far above its historical annual median return of +7.8%.

Analyzing the data reveals inflation has been the most important driver of the correlation between stocks and bonds: whenever U.S. inflation exceeded 2.4%, there was an increase in the median correlation between stock and bond returns. We believe that a drop in inflation in 2024 will lead to lower correlation between stocks and bonds, increasing the diversification benefits and lowering downside risk. Moreover, our analysis of second-year returns following a year when both asset classes yielded a negative return, like in 2022, indicates a likelihood of positive returns for this combination in 2024.

Bottom Line:

We believe this broader contextual analysis, drawing on 200 years of data, provides a valuable roadmap for investors to consider the benefits of a 60/40 portfolio. Despite some skepticism following the challenges of 2022, we believe a 60/40 strategy remains relevant.

¹U.S. equities are represented by the S&P 500 Total Return Index (1926-Present) and the U.S. Market Total Return index (1820-1925), with data provided by Global Financial Data (GFD); U.S. Bonds are represented by 10-year U.S. Treasury Total Returns (1820-Present), with data provided by GFD. Index definitions can be found in the disclosure section. The indexes do not include any expenses, fees or sales charges, which would lower performance. The index is unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

²Recency bias is making decisions based on recent events, expecting that those events will persist in the future.

As March is Women's History Month, it's timely that we review women's headway moving up the corporate ranks and the progress of gender diversity initiatives worldwide.

This marked the seventh year in a row that Calvert scored the 1,000 largest U.S. publicly traded companies across 230 environmental, social, and governance (ESG) performance indicators for Barron's annual list of the "100 Most Sustainable U.S. Companies." The top 100 firms included in Barron's achieved the highest scores across those ESG metrics, ranging from workplace diversity to greenhouse-gas emissions. Here's a brief look at how we did so.