How is the S&P 500 climbing while consumers are struggling financially?
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
WHY DIDN’T BONDS RALLY AS EXPECTED WHEN EQUITIES SOLD OFF?
Shechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
In March, equities sold off. That wasn’t surprising: war breaks out, oil spikes past $120 USD/barrel, markets reprice risk. That’s the playbook. What wasn’t in the playbook is that bonds sold off alongside them. Trillions of dollars wiped off global bond markets in a single month made it the worst month in over three years.
That matters profoundly because the entire architecture of legacy portfolio construction is built on one assumption: when equities decline, fixed income provides a cushion. That negative correlation is the load-bearing wall of 60/40, which many institutional allocation frameworks still use today. In March, that wall cracked.
The reason is straightforward, but the implications are significant. Bonds hedge growth shocks. They do not hedge inflation shocks. And the Iran conflict wasn’t a demand shock; it was an inflation shock. With oil climbing past $120 USD/barrel and energy costs feeding through every supply chain, central banks were forced into hawkish posturing instead of easing. When inflation is the threat, the same force pressuring your equities is also eroding the purchasing power of your fixed income coupons. There’s no offset.
Consider this: 30-year government bond yields in the U.S., U.K., Germany, and Japan all rose in unison during the selloff. Typically, at least one major sovereign bond market provides shelter. This time, none did. The correlation breakdown was global and synchronized.
Most commentators are treating this as an anomaly. I think it raises a more fundamental question. The negative correlation between stocks and bonds that we’ve all relied on wasn’t a law of nature. It was a product of a 40-year disinflationary regime: falling rates, contained inflation and globalization suppressing input costs. That’s the environment where 60/40 worked reliably.
If that regime is over, then the question isn’t whether your bonds had a difficult quarter. The question is whether the ballast in your portfolio is still functioning.
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SUBMIT YOUR QUESTIONShechar Dworski, PhD, CFA – Head of Economics and Director, Macro Strategy
Sam Acton, CFA - Portfolio Manager, Co-Head Fixed Income
Jeff Bradacs, CFA – Co-Head Equity Strategies, Head of Portfolio Management & Trading
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