Question I Was Asked In Several Quarterly Client Meetings

In my Q1 market review, I mentioned that both U.S. bonds and stocks were down together for the quarter, and that was a relatively rare occurrence. I mentioned that only happened 8 other times in the previous 30 years. This was concerning for a few clients.

The primary reason it was concerning for some clients is that I generally have portfolios positioned more conservatively than I would in a more “neutral” environment. In other words, I have a targeted range to which I am bound for each client and am currently positioned on the conservative end of that range for most clients. The reason for the relatively conservative positioning is that I am concerned about stock market valuations (i.e. stocks are about as, or more, expensive as they were in 1929 and 2000…depending on the metric).

So when both bonds and stocks decline together it makes folks nervous. After all, isn’t the idea that bonds will hold up when stocks are declining? To add insult to injury, bonds actually declined MORE than stocks in the first quarter. As a result, several clients asked me, “Why did that happen?” “Will it continue?” “Is this still the right strategy?”

The first quarter serves as a great reminder that historical relationships between different assets don’t always hold up at all times. Yes, generally when stocks are down bonds may be up, or, at least, may be down only a little when stocks are down significantly.

Here are two more interesting statistics on the relative performance between stocks and bonds from Charlie Bilello:

  1. Of the 20 worst weeks for the S&P 500 (since July 2002), long-term Treasury bonds simultaneously declined only in 2 of those. Long-term Treasuries were up in the other 18 worst weeks.
  2. “Since 1928, the S&P 500 and 10-Year Treasury bonds fell in the same calendar year only 3 times (3% of the time), last occurring in 1969.” Stocks and Treasuries rose together 59% of the time and moved in opposite directions 38% of the time leaving just those three years where they both declined together.

That second stat is pretty incredible. So could 2018 be just the fourth time both the S&P 500 AND 10-Year Treasury bonds decline together? Sure it could. It’s more likely that either stocks or bonds (or both) rebound from here with at least one of those asset classes ending the year positive. But even if both 10-Year Treasuries AND the U.S. stock market end the year in the red, it does not mean we should abandon sound, time-tested investing principles.

Remember that in 2008 when the S&P lost 38%, 10-Year Treasuries made almost 20%. I believe if stocks experience significant, sustained stress that Treasuries will hold up far better than stocks and may even appreciate. We’ve seen this play out more recently. Even today, 10-Year Treasuries (Symbol: IEF) are up about 0.30% while the S&P 500 is down over 1%.

We don’t let emotions drive our investment decisions because our emotions usually drive us to do the wrong thing at the wrong time (buy high, sell low). It’s important to remain disciplined, committed and objective.

Disclosures:
This is NOT intended as individualized investment advice but as general education. Always consult an advisor who thoroughly understands your unique circumstances before making any significant changes as your circumstances inform all major financial decisions.

Past performance is no guarantee of future results.