Investors looking for consistent portfolio performance during periods of Fed rate hikes should consider the 55/35/10 allocation, according to new data from YCharts, a Chicago-based financial research company.
Out of 10 analyzed portfolios ranging from 100% equities to all cash, the mix consisting of 55% equities, 35% bonds and 10% cash provided the most consistent returns—performing fourth-best across all four rate-hike cycles since the late 1990s, including the current cycle, the data showed.
But the mixes that landed in first, second and third places were all over the map, said Joe Kleven, YCharts senior marketing specialist, adding that the lack of a trend among how the portfolios performed is all about what else was going on in the economy besides the Fed hikes.
“For instance, the first of the four cycles we looked at was the 1999 to 2000 cycle. And what happened right about there? Well, the dot-com bubble,” he said. “That wasn’t the case in ’04 to ’06, ’15 to ’18, and of course now. And unlike other cycles, this time around cash really kept you above water. Portfolios with a cash component have been doing better, and all-cash is the only one with a positive return.”
However, with the Fed signaling just two more hikes before pausing and then cutting, investors might now want to consider bulking up on equities. All-equities or equity-heavy mixes historically have outperformed in the year following the last Fed hike, according to the YCharts data.
“All the portfolios suffered some kind of correction right around the time of that last rate hike,” Kleven said. “And that was definitely more pronounced in the portfolios that have a larger equity weighting.”
But the reason is unclear. One possibility, he said, is that the last rate hike might have increased investor anxiety, and the Fed, recognizing that’s not good for long-term wealth, stopped the hikes there.
“And when they did stop the hikes, every single time it was a V-shaped recovery,” he said. “In the year that followed, all the portfolios took off to the races and especially those with a higher equity weighting.”
Aside from heavier equities, another good move would be locking into high bond rates before the Fed starts cutting, Kleven added.
“Then if rates start to be cut, the value of those bonds will rise,” he said. “Just getting that extra duration at the higher rate could not only give you a value boost, but it could be an outperformer in the right time frame.”
Digging Into The Data
To comb through the data for a trend, YCharts started with a sample portfolio of 60% equity and 40% fixed income, and then adjusted the portfolio to reflect 10 different allocations ranging from all equities to all cash.
The sample portfolio consisted of five Vanguard funds—Total Stock Market Index, Total International Stock Index, Emerging Markets Stock Index, Total Bond Market Index and Short-Term Bond Index. In addition, the Schwab Value Advantage Money Fund was used for the more conservative cash allocations of four of the funds.
The 10 allocations started with the 60/40 split, then for more equity-weighted portfolios went to 80/20 and 100/0. For more fixed-income weighted portfolios, the analysis included a 50/50 split, a 40/60 and all bonds. Then adding in a cash position, the allocations were 55/35/10, 45/25/30, 30/20/50 and all cash.
YCharts selected the four most-recent rate-hike cycles (1999-2000, 2004-2006, 2015-2018 and 2022-present) and calculated performance for the 10 portfolios using two timeframe options—the full rate hike cycle from start to end and the start of the cycle through one year after the final rate hike.
In addition to looking at best-performing portfolio mixes, YCharts researchers also looked at best-performing asset classes, comparing the S&P 500 (Large Cap), Russell 2K, Russel 1K Growth, Russel 1K Value, Commodities, U.S. Real Estate, Aggregate Bonds, Cash, Developed Markets and Emerging Markets, against the sample 60/40 portfolio.
Asset Classes Just As Unpredictable As Portfolio Mixes
“One thing that was confirmed is that no particular asset class consistently outperforms or underperforms across multiple rate-hike cycles. There always seems to be a different best performer, worst performer, with the exception for the most part of the 60/40 portfolio,” Kleven said.
Typically, the 60/40 portfolio lands around the middle of the pack because it’s designed to be that consistent, chugging-along asset allocation, he said, though even then there’s room for improvement from time to time.
“The one thing that surprised me about this current rate hike cycle we’re in is that even though it had a negative 3.5% return, the 60/40 was actually third best asset class out of the 11 that we studied,” Kleven said. “That’s a significant break from its typical fifth or sixth place finish.”
Knowing that the 60/40 was the most consistent performer across all cycles should be a talking point for advisors with their clients, as it’s encouragement that staying pat in a consistent portfolio will enable them to weather the ebbs and flows of the markets, he said.
And this time around, there are only two of the 11 asset classes that are in the green—developed markets followed by cash. The rest, including that 60/40 portfolio that came in third, are negative in that span.
“We’ve had a bit of a bull market resurgence here, so will cash take a back seat? If the Fed hikes again, will cash be king again?” Joe queried. “Those are the kinds of questions that I think are on advisors’ minds, and this data might hint one way or another at the answer.”