Investors worried that the classic 60/40 portfolio is broken can breathe a sigh of relief—for now. During the stock market selloff that rocked portfolios for the first week of August, high-quality bonds returned to form and delivered the type of defense investors had grown accustomed to before the nearly four-year-long bond bear market. It was a short stress period, but the results are encouraging for investors who have stuck with the 60/40 portfolio through its recent diversification struggles.
From Aug. 1 through Aug. 5, the Morningstar US Market Index plunged 6.3%. The selloff was more notable for its speed than its depth. It was the worst five-day performance for the index since June 2022, when inflation fears peaked.
But for the first time in a long time, investors who owned high-quality bonds were rewarded during the volatility. The Morningstar US Core Bond Index rose 1.5% during the period as a flight to safety and the hope that the US Federal Reserve will cut interest rates this year boosted those bonds. As of Aug. 9, the odds of a 50-basis-point rate cut in September were over 50%, up from 3% a month earlier, according to CME FedWatch, which tracks the probabilities of changes to the bank’s overnight lending rate, as implied by 30-Day Federal Funds Rate futures prices. Interest rates fell in line with market expectations. For example, the US 10-Year Treasury Bond went from a yield of 3.99% to 3.78% during the market drawdown. When yields fall, bond prices go up.