Will the 60/40 classic portfolio return to form in 2024?

The classic portfolio split into 60% equities and 40% bonds and fixed interest should come back into its own again in 2024 after a terrible 2022 and a very hesitant recovery in 2023.

Thursday, December 21st 2023, 6:00AM

by Jenny Ruth

That's the view of Andrew Pease, Russell Investments' global head of investment strategy.

The 2022 year was one of the worst ever for the classic portfolio because both equities and bond prices fell at the same time, with the US 10-year Treasury bond yield rising from 1.5% in early 2022.

The US 10-year bond peaked at just a fraction below 5% in mid-October and has now fallen below 4%.

“The bottom line is government bonds are likely to re-establish their role as effective diversifiers for multi-asset portfolios and, as a result, we expect the 60/40 portfolio is set for a comeback,” Pease said in his firm's 2024 market outlook.

Pease isn't as confident as the market appears to be that the US will be able to avoid a recession, but he notes that covid has made this cycle particularly difficult to read.

“This is a weird cycle. Nothing is quite right in this cycle,” he said, noting that this time last year everyone was pessimistic about 2023 with the Federal Reserve Bank of Philadelphia's survey of professional forecasters predicting the highest probability of recession in that survey's 45-year history.

Of course, the forecasters turned out to be completely wrong.

By contrast, a recent Bank of America survey found that 74% of US fund managers are now expecting “a soft landing” for the US economy.

“We are in a twilight zone between slowdown, possible recession, and recovery, where noting is likely to be quite what it seems.”

While businesses and households had built strong defences against the Fed's tightening, “these defences, however, are beginning to crumble. Households will soon exhaust their excess savings while significantly higher interest rates, which have become a constraint on new borrowing, will create refinancing issues,” Pease said.

While the US economy may yet avoid a recession, “the risks are elevated.”

The outlook for the New Zealand economy is mixed but NZ bonds “look slightly cheap. Monetary policy is tight and is likely to remain that way for some time,” Pease said .

“However, aggregate demand should be supported through 2024 by a notable pick-up in population growth,” he said.

The recent change in government after the October election “will likely see fiscal policy become less supportive over the second half of 2024.

Tags: Russell Investments