The huge outperformance of stocks over bonds this year might tempt investors to think a rebalancing is on the cards soon, but history suggests they should increase exposure to equities once the Federal Reserve’s interest rate-raising cycle ends.
This is helpful for more conservative or passive investors too - the relative strength of equities helps boost the performance of the typical ‘60/40′ portfolio split 60% into stocks and 40% in fixed income. The 2004-06 and 2018-19 cycles were very similar. Equities returned around 26% in the year after the Fed stopped tightening, bonds between 6-8%, and a 60/40 portfolio around 18%. 1999-2000 was an anomaly.
The S&P 500 is up 27% and the Nasdaq is up 37% from their troughs last October, and the NYSE FANG+ index of ‘Mega Tech’ stocks is up more than 90% from its November low. Shelly Simpson, senior analyst at Truist, has looked at six previous Fed hiking cycles excluding the turbulent Volcker years in the early 1980s, and how stocks, bonds and a 60/40 portfolio comprising the two have performed in the year after ‘peak Fed.’