It is no secret that the stock market is in the doldrums. So far this year, the S&P 500 index, a barometer of the broader stock market, has sunk 16%. After withstanding all the punishment they could take, investors fled from the traditional portfolio composition of 60/40, comprising stocks and bonds. However, according to Bloomberg, Wall Street firm Morgan Stanley claims that while the 60/40 strategy may be down, it is not out.
It should be no surprise that Wall Street investors have abandoned the traditional model. In the first half of 2022, investors exited risky assets, hunting returns elsewhere as stocks suffered their worst decline in over three decades. Meanwhile, the rapid rise of interest rates sent the bond market reeling in the same period.
Typically stocks and bonds have an inverse relationship, where when one asset class falls, the other tends to rise. This has not been the case in the current bear market cycle, as both asset classes have suffered with no offset.
Morgan Stanley’s chief cross-asset strategist, Andrew Sheets, is predicting it will not be long before investors return to the 60/40 portfolio, pointing in part to beat-up stock valuations that are poised to make a comeback. He claims the strategy is poised to deliver 6.2% annual returns to yield-starved investors over the next decade.
Sheets shared that the 60/40 model is the best bet for both American and European investors over the long term as valuations recover. He stated in a report, “Hence, despite recent struggles, the case for 60/40-type approaches endures, with higher estimated long-term returns in the U.S. and Europe over the next decade than at most points over the last 10 years.”
This means that while the market has taken investors on a roller coaster ride as of late, volatility will likely subside as stocks and bonds recapture their inverse correlation.
Still, not everybody is convinced. Roensch Capital, which has over 64,000 followers on Twitter, took issue with Morgan Stanley’s claim that the 60/40 model would provide investors “protection.” They retorted that the Wall Street financial firm’s experts must have forgotten about the “rampant inflation” in the economy currently wreaking havoc on the bond market. However, Roensch Capital signaled its bullishness on stocks for the next six-to-nine months.
Morgan Stanley BOASTING that a 60:40 stock/bond portfolio should post a 6% annual return over the next 10 years, offering investors "protection".
Did we forget about rampant inflation?
Drives me nuts.
My own research suggests a beautiful next 6-9 months for stocks.
— Roensch Capital (@RoenschCapital) July 25, 2022
While Morgan Stanley touts a bullish take on the long term, investors might want to buckle up for the short term. With the Federal Reserve still implementing aggressive interest rate hikes to combat high inflation and the earnings season continuing to unfold, market volatility could persist for a while.