The problem is that this is predicated on the notion that they will not fall at the same time. As shown in Mullarkey’s charts, we’ve become accustomed to the idea that as bond yields rise (and their price falls), so stocks will rise, and vice versa. But in this environment, it looks as though we should get ready for that relationship to change, which could shake confidence in retirement saving as it is currently practiced.
Here are the monthly returns on Bloomberg’s index of U.S. 60-40 investments, going back to 2007. Only the disaster months of October 2008 and March 2020 were worse than April of this year:
It gets worse. There is also a marked relationship between the Fed’s addition or removal of liquidity and the success or failure of 60-40 funds, as shown in this chart from MUFG Americas:
When the Fed is priming the pump with quantitative-easing asset purchases, 60-40 does well, and when it attempts to tighten with QT, 60-40 plans do badly. We learn today about what the Fed will do about quantitative tightening, and it’s likely to put even more pressure on retirement plans.
The irony is that higher bond yields have actually made life easier for defined-benefit plans, because they make the liabilities they have to guarantee cheaper. For people saving in target-date funds, any continued pattern of falling bonds and equities is going to look terrible, and could shake a generation’s faith in their retirement savings. It’s one of many risks with which the FOMC must contend.
Survival Tips
It’s always a good tip to remind everyone to treat people with kindness. The New York Yankees are in the middle of an epic winning streak at present, which I’m not enjoying, but an incident from their win over the Toronto Blue Jays tonight warmed the heart. The Yankees’ star Aaron Judge hit a home run high into the stands, a Blue Jay fan retrieved it—and then immediately gave it to a young boy wearing an Aaron Judge shirt in the row behind him. The boy was consumed by emotion. It’s a wonderful gesture that he’ll remember the rest of his life, and I imagine the good Torontonian will feel far better for this act of generosity than he would had he simply held on to the ball as a souvenir.
Another tip is to remember that Canadians really are that nice. Even at sports games. The one time I went to see the Blue Jays in Toronto, they lost a very exciting game to the Red Sox with David Ortiz slugging the game-winning home run (on what proved to be the last time I ever saw him at bat before his retirement). Exquisitely, Ortiz even did this off Joaquin Benoit, the pitcher he had victimized three years earlier in one of the most dramatic moments of his career. Sitting with a Red Sox cap surrounded by people in Blue Jays blue was not remotely uncomfortable. And when the boy behind me yelled “Boston sucks,” his mother insisted that he apologize to me. Such niceness and courtesy does make for a happier life, and it doesn’t have to stay in Canada. So, be nice to people—and if you need guidance on how to do this, maybe go to Toronto.
John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of The Fearful Rise of Markets and other books.