Inflation reduces bonds’ ability to absorb stock market shocks
A 60/40 portfolio, typically comprising 60% stocks and 40% bonds, has historically provided stability. However, when inflation rises, bonds become less reliable as a shock absorber.
The S&P 500 total return index has surged above its early-2022 level, while a 60/40 portfolio has climbed back above its starting point with less force. The Bloomberg Aggregate Bond Index has only recovered to its initial level.
Inflation has broken the traditional playbook, with the Federal Reserve raising interest rates aggressively. This has made bonds more attractive for income, but has not fully offset stock market losses.
The pain has been evident in long-term bond funds, such as the iShares 20+ Year Treasury Bond ETF, which has been pushed back toward pre-financial-crisis prices.