An interesting little factoid out from Man Group earlier this week on the recent bout of market mayhem (our emphasis below):
Since 1960, there have been 44 individual instances of the S&P 500 index enduring five or more consecutive down weeks. Since 1973, US Treasuries have had 31 such losing streaks lasting at least five weeks.
Yet these prolonged sell-offs had never coincided — until the start of May. For the first time in the near 50 years for which we have both data sets, the two sides of a typical 60/40 US portfolio have lost money for five weeks in a row.
Because it’s literally never happened before, there’s no way of knowing what is likely to come next. But Man Group had a crack at it anyway, going off what happened in the months following previous five-week-long S&P 500 spirals.
The table shows, for example, that 18 months after previous declines for the S&P 500, investors earned a positive return 76 per cent of the time, with an average return of 12.2 per cent across all 43 instances. Man also note, however, that the S&P 500 fell a further 20 per cent one year after 5-week losing streaks in 1969, 2000 and 2001.
Of course, the problem today is that we seem to be in an entirely new market regime, so it’s questionable how much historical patterns can really tell us.
Sure, stocks have now fallen a lot already as investors price in central banks getting their hike on, and some opportunities are probably starting to crop up. But it remains unclear how tight policy can/should/will become and what might break in the journey there.
Moreover, as Man Group highlights, the biggest problem for investors is when both bonds and equities keel over at the same time.
The death of the 60/40 balanced fund (for the rubes, 60 per cent stocks and 40 per cent high-grade fixed income) has admittedly been called comically often, but things have unquestionably taken a nasty turn lately.
Vanguard’s flagship $52bn 60/40 fund is down over 13 per cent this year by pixel time. This is hardly ARKK territory, but is exceptionally poor for a fund that has delivered pretty great risk-adjusted returns for a generation. Financial crisis-level poor.
For the past four decades, bond returns have both been steady and countercyclical. It was like investors were paid to take out insurance against stock market fires. Now, it’s like your insurance is actually burning down your house of stocks.
Earlier this year, AQR Capital Management estimated that based on current valuations and historical return patterns, a global 60/40 is only likely to eke out a 1.9 per cent annual gain after inflation over the next 5-10 years, compared to an average of almost 5 per cent. For fans of financial horror, the report is here.
That said, there are some signs that the bond market sell-off is calming down, and some smart people think the whole 60/40 death narrative is overdone. Tell us what you think in the comment section.