Stocks and Bonds Rising in Sync for Now

A 60/40 mix of U.S. stocks and bonds generated a 13.6% return through the first six months of this year, “the best start for this portfolio since the first half of 1997,” according to a recent article in Fortune by Ben Carlson.

The article notes that this was just the eleventh time such a portfolio began the first half of the year with a double-digit return.

“This relationship might not make sense to those who assume stocks and bonds should move in different directions,” the article says, ” but the whole point of diversification is to combine assets that act differently during various market environments.” But investors, it explains, can sometimes confuse how to evaluate these correlations: “Most investors assume you want to own negatively correlated investments…But what you really want is assets that have a positive expected return profile with correlations that change over time depending on the market environment.”

The fact that the relationship between stocks and bonds is always changing is a good thing, the article argues. “The true time for bonds to shine in a portfolio is not when stocks are up but when they’re down, which is the only time you want the negative correlation to kick in.”

The article concludes that bonds can offer investors stability during times of market volatility, giving them the opportunity to “rebalance into falling stocks or use bond proceeds for spending needs.” The first half of the year was “about as good as it gets for investors in U.S. stocks and bonds. That won’t last forever. The good news is when the inevitable setback occurs in stocks, bonds tend to provide some shelter from the storm.”