This has been a strange period in that both traditional bonds AND stocks are down around 7%-8% simultaneously. Historically, if stocks were down like this bonds would at least be holding up, if not appreciating, and vice versa.

A couple months ago I wrote a commentary about why we own treasuries in portfolios referencing the fact that since 1928, treasuries and stocks have only been down simultaneously in the same year three times! Historically, stocks and treasuries have been great complimentary, non-correlated assets. In fact, they have about a negative 0.40% correlation.

At this point, if nothing were to change for the rest of the year, we could have our fourth year in almost a century where both bonds and stocks are down simultaneously.

Does this change the rationale for owning stocks and bonds together in a portfolio? Of course not. Do we deviate from time-tested portfolio construction principles because long-term relationships break down for a short time? Nope. That’s how people get themselves in trouble.

Although, we can (and do) make tactical adjustments at the margins to help insulate against specific risks and smooth volatility. In my case, I’ve included the U.S. Dollar and precious metals (gold, silver and gold miners) in portfolios both of which have helped this year.

I’ve also recommended some clients pay down debt (even if it’s cheap debt) and build up cash reserves beyond the traditional rules of thumb (e.g. 3-6 months’ of living expenses) even as those two recommendations cost me assets under management and income.

When bonds and stocks are down ~7% within a few months it feels good to have a little extra cash in the bank or have used excess cash that was earning 0% anyway to pay off an interest-bearing mortgage, for example.

Note: Short-term treasuries are now paying a decent yield (at least, in the context of the last 15 years) so we have recently been allocating excess cash reserves to 1- and 2-year treasuries yielding over 2%-2.5%… obviously far surpassing interest offered by banks in checking / savings accounts.

Chart below showing history of 2-year treasury rates since the mid-70s…


A primary catalyst for bond and stock declines this year is the combination of high inflation and the Federal Reserve tightening monetary policy (i.e. raising interest rates and reducing their balance sheet).

Commodities and the U.S. Dollar are two major asset classes that have actually made money so far this year.

That brings us to another reason this has been a unique period because both the U.S. Dollar and precious metals are up simultaneously. Typically, you wouldn’t see those two asset classes so correlated either.

Below are the YTD returns of some of the major asset classes typically included in portfolios.



The first quarter was one of the worst quarters in history for bonds. While stocks are down about the same as bonds, it is not a notable decline for stocks as I discussed recently here. Stocks lose over 10% every other year with an average intra-year decline of over 14%.

Stocks, we know, can experience significant volatility and much larger drawdowns, which is why, even though bonds and stocks are down about the same on the year, most people’s focus and concern has been on the bond market since this magnitude of decline in bonds is quite rare.

Markets are forward-looking, constantly looking to anticipate what may happen in the future and pricing in likely outcomes. At the moment, the bond market is already pricing in consistent interest rate hikes from from the Federal Reserve…no surprises there.

It’s the surprises that should move markets from here. So, what are some potential surprises related to inflation and monetary policy?

Potential Surprise #1
Inflation continues to remain high, or increase further, indicating the Fed is well behind the curve and will have to be more aggressive than anticipated to combat inflation before inflation runs out of control. This could cause bond markets to fall further (along with stocks and real estate as well).

Potential Surprise #2
Inflation eases up faster than the market expects indicating less aggressive tightening from the Federal Reserve than is currently priced in. This could cause market interest rates to fall and push bond prices back up.

Some potential catalysts for inflation easing faster than expected are recession, inventory replenishment, supply chain repair, termination of stimulus, less consumer spending and less demand for goods for a variety of reasons, less appetite and/or capacity for debt, etc…

Remember, it’s not what everybody knows that move markets as that knowledge is already priced in but the unexpected developments both positive and negative.

Note: All performance data is through April 8th as opposed to quarter end.


Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.

Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.

Bear market stress test assumes a 2007-2009 scenario. However, the next bear market could look quite different with different asset classes performing differently than they did then, which impacts the return and loss assumptions.

The projections here assume we shift to a balanced 50/50 portfolio at retirement in both scenarios.

This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.

Views provided here are current only as of the moment of posting and are subject to change at any time without notification.

Print Friendly, PDF & Email