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Inflation Can Make or Break a 60/40 Portfolio Rally

Lewis Krauskopf and David Randall

NEW YORK (Reuters) – Investment strategies designed to hedge against market declines are rebounding after a tough year, but their success may depend on currencies Whether or not inflation persists will fade in the coming months.

So-called 70/16 portfolios usually allocate 70% of assets are invested in stocks and the remainder in bonds, although ratios tend to vary. The strategy relies on these two assets balancing each other out, with stocks strengthening in an upbeat economic environment and bonds rising in times of uncertainty.

That diversification failed to benefit investors last year as both stocks and bonds fell as the Federal Reserve raised interest rates to fight soaring inflation. The typical 50/ portfolio tracked by Vanguard over the last year has suffered since Worst annual decline .

Things look more promising so far, 70/16 The portfolio grew approximately 5.5% in the first quarter, following last year’s 16 After a drop in %, Vanguard’s data showed.

Future performance of the strategy may depend on the effectiveness of the Federal Reserve in reducing inflation. Signs of persistently high consumer prices could fuel bets that central banks will keep interest rates high for longer, with tighter credit conditions weighing on stock valuations and pushing bond yields higher, moving in the opposite direction to prices.

Investors hope Friday’s monthly jobs report and next Wednesday’s consumer price index will provide more information on whether the economy is cooling.

Some investors are bracing for more turmoil in the economy in both asset classes, fearing the Fed’s battle with inflation isn’t over. Jack Ablin, chief investment officer at Cresset Capital, cut bond holdings and increased his allocation to gold, a popular inflation hedge.

“Inflation, and the perception that inflation leads to tighter credit, will hurt bonds and stocks,” he said. “Once we can get back to the steady state again, past in this inflationary period, then I think 50/16 will Works again.”

Preparing for a downturn

Still, the case for diversification has emerged this week. Stocks fell after Tuesday’s labor market and manufacturing data raised concerns that the economy may be weakening. Those losses were at least partially offset by lower benchmark Treasury yields.

Proponents of the strategy argue that its bond component can help cushion the impact of a recession on investors’ portfolios.

In fact, the benchmark year Treasury yield fell by approximately 50 basis points since early March, as investors bet that turmoil in the banking sector will lead to tighter lending conditions and bring a recession closer.

Even if inflation worries weigh on bonds again this year, some investors believe the damage could be muted as rates are already at much higher levels after jumping from near zero last year. The yield on the benchmark year U.S. Treasury last held around 3.3% after starting at 70 around 1.5% .

“We’re getting gains in the bond market now that we haven’t had in years,” said market analyst Paul Nolte Strategist at Murphy & Sylvest Wealth Management. “Higher yields help cushion the impact of slowly rising interest rates.”

Nolte’s portfolio is roughly 50 percentages of stocks and bonds as he prepares for a recession.

“Our expectation is that if the stock market does crash, it will be because we are entering a recession and we will see lower interest rates,” he said.



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