September’s Consumer Price Index (CPI) from the Bureau of Labor Statistics said inflation was 8.2% year over year, hotter than many expected. This inflation report solidifies our expectation that the Federal Reserve (Fed) will likely hike the federal funds rate by 75 basis points (bps; 100 bps = 1.00%) in November and by another 75 bps in December.

Fortunately, everything isn’t rising in unison. With services representing 60% of the basket of goods and services tracked by the CPI, though, not enough progress is being made yet to indicate that the Fed can pivot to a less aggressive pace of rate hikes.

The market can move wildly over short horizons, so it’s helpful to take a step back and take the longer view. Coming into 2022, the market was pricing in supply chains healing, economies continuing to recover from COVID-19 shutdowns, and robust corporate profit growth. Putin upset things pretty early on with his invasion of Ukraine. China didn’t abandon its zero-COVID-19 policy, which served as another shock to supply chains and dampened global demand growth. And then, the Fed started hiking rates aggressively—a type of “Ka-Powell” moment for the markets.

All of these things conspired to darken the outlook to the point that even diversified portfolios posted significantly negative returns. We’ve had three consecutive quarters in which a portfolio composed of 60% in the S&P 500 Index and 40% in the ICE BofA U.S. Corporate & Government Index lost money.

Believe it or not, things have been worse. The chart below shows the fiscal quarters in which a similar 60/40 portfolio had a trailing one-year return of negative 10% or worse.

The year 1974 jumps out as a worse period: In the wake of an oil embargo and rising inflation, a 60/40 portfolio then experienced five quarters in a row when the trailing one-year total return was negative. However, the subsequent one-, three-, and five-year returns were pretty good.

Other years that were worse than 2022 have interesting backstories, too. In 2001, there was the aftermath of the Tech Bubble burst and the recession around the September 11, 2001, terrorist attacks. In 2008 and 2009, we went through the Global Financial Crisis. In each case, after the wreckage took place, it helped to wait for and ride a rebound.

Perhaps a lesson is that just when it feels like it’s time to throw in the towel on 60/40, that’s when 60/40 might stage a recovery.




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