Wall Street has been hit by a brutal market sell-off this year.
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The classic investment strategy of 60% stocks and 40% bonds has had a dismal year, and many predict its demise.
But Goldman Sachs Asset Management says it could come back in 2023, going by past patterns.
Attractive bond yields could add to the portfolio’s appeal, according to the $2 trillion asset manager.
The classic 60/40 investment portfolio is headed for one of its worst years ever, prompting many a market commentator to predict its imminent demise.
Not so fast, according to Goldman Sachs Asset Management.
The traditional investment model — a combination of 60% stocks and 40% bonds — could make a comeback in 2023, the US money manager said in a recent note. That’s when the sharp surge in bond yields over the past two years could boost portfolio returns and compensate for continued interest-rate volatility.
Furthermore, history shows the 60/40 portfolio tends to deliver strong returns in the years immediately following a period of negative returns, Goldman Sachs Asset Management said in its note.
“Performance for an illustrative traditional 60/40 portfolio has been challenged in 2022 amid surges in interest rates, recession risk, and broader market uncertainty,” it said.
“However, past instances of 60/40 drawdowns have delivered strong performance in subsequent calendar years.
“We believe 2023 may be able to deliver a similar rebound, as attractive yields across the fixed income universe may offset rate market volatility.”
An illustrative 60/40 portfolio has suffered losses of around 12% so far this year, on track for the biggest annual negative returns since 2008, according to the money manager, which oversees more than $2 trillion in assets.
Historical pattern
The model previously saw declines in 2018, 2008 and 2002. Each time, it delivered a strong rebound during the following year — 22.4% in 2019, 18.2% in 2009 and 18.8% in 2003.
Should that pattern repeat, it would mean a much better year ahead for the investing strategy.
The outlook for the 60/40 portfolio has also brightened due to increased bond yields, according to Goldman Sachs Asset Management.
Fixed-income yields have surged over the past two years as inflation accelerated, forcing the Federal Reserve to raise interest rates aggressively. The yield on the benchmark 10-year US Treasury has climbed about 320 basis points from the lows reached in the first quarter of 2020, to around 3.50%.
Goldman Sachs isn’t the only money manager that finds bonds attractive now.
“We are more excited about bonds than we have been in over a decade,” strategists at JP Morgan Asset Management led by Karen Ward wrote in a recent report. “Looking forward, it’s clear that the income on offer from bonds is far more enticing.”