Goodbye, Yellow Brick Road

 

Now is always the hardest time to invest. - Bernard Baruch

Nine months into the year, and the market competitors are revving for the final leg.

As Barron’s Forsyth points out, stats like “S&P is up 5.57%” over that period don’t tell the tale of a wild, mostly COVID-19-induced ride. Funny but fixed income Bloomberg Barclay’s US Aggregate Bond Index measure managed a better 6.79% in that frame.

Why is that funny? After a very good 2019, bonds appeared – theoretically – played out. Relegated – again, per the wags – to wallow in days of futures to come  because Fed policy says 0% for the rest of our useful lifetime. 

As discussed before, the balanced 60/40 equity/bonds ration (which shifts to 40/60 over the investors lifetime) does not seemed promising to deliver balance. Bond yields are at historic lows. A “Japanization” seems underway – where markets find and stay in stasis for years. That is still a more or less operational forecast for the future.

TIPS and gold are ventured instead of T-notes. Unless you are trying just not to lose principal. They have low or no yields, but don’t hold so much risk.

Finally, what Forsythe and his sources edge toward is a “bond mix” that is more a hybrid of odds and ends instruments. Investors have been playing with such complex combos. I hear some chatter, let's listen in:

Together, the 60/40 portfolio is projected to return 3.5% a year over the next decade, according to [J.P Morgan Strategist Jan] Loeys’ estimates. That would fall far short of the needs of many institutions, such as pension funds and endowments. For an individual, after taxes, that return would barely stay ahead of inflation, if that.

Adding the suggested alternative investments might lift returns significantly. Since 1987, a “hybrid” mix equally weighted in high-yield bonds, convertibles, REITs, and utilities has returned 10% annually, versus the S&P 500’s 11%.

Looking ahead to the next 10 years, a mix of 20% traditional bonds, 40% hybrids, and 40% stocks would provide an estimated yearly return of about 4%, the bank’s simulation shows. It should be emphasized that the hybrids’ annual volatility can be nearly as high as stocks’ (as the March meltdown across the capital markets dramatically demonstrated), but is significantly lower over a decade.

I have plied the portfolio hedges, including REITs, Emerging Market Bonds, European Bonds, and Strategic Real Returns ( inflation-protected debt securities, floating-rate loans, commodity-linked notes and related investment ) and have been looking for some simplification, as this is too much to hold in the head. I remember the old Chad Mitchell song “My name is Morgan, but it ain’t J.P.” 

Meanwhile the markets watched the Abominable One-Man Trump Swarm Debate and felt up. The market stopped a decline and went up last week, giving back gains when the great one came down with COVID-19 Friday. Futures blipped up with word he might get out of Walter Read Monday.

 On the week past, DJIA was up +1.87%; the S&P notched a +1.51%; the NASDAQ gained a roughly similar +1.48%; and the Russell 2000 finally produced something stellar: a +4.37% improvement. Financials, Utilities and Consumer Goods led. Gold was up $43 on the week. 

– Baruch Bernard

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A 60/40 Stocks/Bond Strategy Doesn’t Work. What to Do Instead. - Barrons 

Multi-Asset Solutions. - J.P. Morgan Weekly Strategy Report*

* From the Multi-Asset Hymnal: While our constructive central case leads us to maintain a risk-on tilt in our multi-asset portfolios, we anticipate some volatility over the autumn and look to remain well diversified and nimble. We spread our risk between stocks and credit, while within equities we favor a broad regional diversification. We also move to underweight USD, which has scope to weaken as the global recovery gains momentum. Although we are mildly underweight duration, central bank backstops in credit markets sometimes allow us to use high quality corporate credit as a proxy for duration.