Are Bonds Actually a Reliable Hedge for Stocks? The first six months of 2022 were challenging for investors, even those with diversified portfolios of stocks and bonds. Indeed, one of the most significant 'issues' with 2022's market drawdown has been the atypically tight correlation between stocks and bonds. Consider that in the first six months, an investor with an all-equity portfolio likely performed in-line with someone invested in a 60% stock/40% bond portfolio.1 In the first four months of the new year, long-term U.S. Treasury bonds were off -18% while the stock market dipped into bear market territory. That's not supposed to happen. One of the key benefits of a balanced asset allocation of stocks and bonds is to limit downside volatility during sharp equity market pullbacks, and so far in 2022, bonds have failed to deliver. The breakdown in this relationship between stocks and bonds has some investors wondering if bonds are no longer a reliable hedge for stocks.
Where Should You Invest During this Bear Market? Many investors are unsure how to navigate the current bear market. It's important to remember that bear markets do not last forever, in fact, they are generally much shorter than bull markets. Therefore, instead of sitting on the sidelines and potentially missing upward movement, I recommend making decisions now based off fundamentals. To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as: - U.S. Macro Outlook
- What fundamentals are U.S. stock markets pricing in with '22 and '23?
- What of U.S. GDP Growth?
- Zacks forecasts for the remainder of the year
- Zacks rank S&P 500 sector picks
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! IT'S FREE. Download the Just-Released August 2022 Stock Market Outlook 2
But I don't see the first six months of 2022 as an indication for how the relationship between stocks and bonds will play out moving forward. Investors should also recognize that throughout history, there have been several periods – sometimes long ones – where bonds and stocks were positively correlated. Those periods also happened to be ones where there was high inflation uncertainty, i.e., the 1970s and 1980s. For most of history, however, bonds have been effective at mitigating equity market risk, and they have also helped portfolios generate positive returns during periods when equities sold off sharply. During the past 20 years, for instance, there has been a consistently negative correlation between stocks and bonds, with basically the only exception being 2013's "taper tantrum" when both declined in lockstep.3 As readers can see in the table below, long-duration U.S. Treasury bonds have held up remarkably well – and almost always delivered positive performance – during the biggest equity market drawdowns. 2022 is arguably the exception, not the rule. | Period | Cumulative Stock Market Return (S&P 500) | Cumulative Long-Duration US Treasury Bond Return | | November 2007 – February 2009 | -50.9% | +16.0% | | August 2002 – September 2002 | -44.7% | +28.5% | | December 1972 – September 1974 | -42.6% | -6.0% | | September 1987 – November 1987 | -29.6% | +2.7% | | December 1986 – June 1970 | -29.3% | -8.0% | | January 1962 – June 1962 | -22.3% | +4.0% | Source: Morningstar, UBS 4 Some have argued that an inflation rate of 2.5% is the point at which stocks and bonds flip in correlation from positive to negative or vice versa. During high inflation regimes, bonds suffer as coupon payments become less valuable and as investors demand higher yields, and stocks suffer from lower expected growth rates and cost pressures. High inflation can thus hurt both asset classes. Expectations for higher-than-average inflation does not mean it's time to abandon bonds in an investment portfolio, however. The fixed income portion of a portfolio can still serve the purpose of generating cash flows and mitigating equity volatility risk, especially when the bonds in a portfolio are actively managed as we do here at Zacks Investment Management. For the past couple of years, we have held a fairly cautious stance on fixed income as we anticipated rising rates, and with the Fed likely remaining hawkish for the rest of the year, we have decided to keep duration on the shorter end while focusing on higher credit quality bonds. This type of active management is needed, in my view, to navigate the changing market environment but also to ensure a fixed income allocation is serving its purpose. Bottom Line for Investors The first six months of 2022 were a rocky stretch, no matter how investors were positioned. Seeing stocks and bonds move in lockstep downward was a break from what we've experienced in the last two decades, when the two asset classes were consistently negative in correlation. Looking ahead, it is possible that a positive correlation between stocks and bonds could persist in a high inflation regime, but I do not think that means abandoning fixed income in a portfolio. Instead, investors should focus on active management in a balanced portfolio to ensure fixed income allocations are serving their purpose. In addition, I advise that you focus on the fundamentals and key data points. To help, I am offering all readers our Just-Released August 2022 Stock Market Outlook Report. This special report was created to help you better prepare your investments for any market changes. It contains some of our key forecasts to consider such as: - U.S. Macro Outlook
- What fundamentals are U.S. stock markets pricing in with '22 and '23?
- What of U.S. GDP Growth?
- Zacks forecasts for the remainder of the year
- Zacks rank S&P 500 sector picks
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! IT'S FREE. Download the Just-Released August 2022 Stock Market Outlook 5 | 
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