Indeed, following the December plunge in U.S. stocks, the U.S. Federal Reserve Chairman Jerome Powell said central-bank policy is flexible and officials are “listening carefully” to financial markets.
“In the current inflation-targeting regime where central banks are credible, we find it hard to see prolonged periods where inflationary concerns make returns in both stocks and bonds negative at the same time,” Maharaj said by email. “A key view we hold is that bonds act as a diversifier in the event of negative growth shocks and the negative stock-bond correlations will reassert in growth slowdown scares or recession fears."
Foolproof No More
In a low-return world, there are plenty of reasons to fret the fortunes of traditional 60/40 portfolios -- but the prospect of bonds losing their hedging firepower could prove the last straw.
With stocks forecast to post paltry gains and bonds expected to generate not much more than their coupons this year, Christophe Donay at Banque Pictet & Cie SA has turned to other hunting grounds -- namely real-estate and private equity.
“This is the first time in my career that I have seen such a breakdown of correlations between bonds and stocks,” said Donay, the head of asset allocation and macroeconomic research at Pictet, whose career has spanned three decades. “We decided to diversify to illiquid assets because of the poor returns in bonds and stocks.”
So-called “endowment style” investing -- designating one-third each to stocks and bonds, and another third to illiquid assets -- is supplanting 60/40 in many of his funds, he said.
Wells Fargo’s Jacobsen remains a believer in diversification. A balanced portfolio may have lost money last year, but less than if investors had put everything into equities.
After suffering its worst year in a decade, DFA’s Global Allocation 60/40 Portfolio is bouncing back and reversed course in late December.
“Diversification just changes the trade-offs investors face,” Jacobsen said. “In hindsight, those trade-offs could be like trading a slap in the face for a punch in the gut.”
This article was provided by Bloomberg News.