Turbulence tests 60-40 strategy's limits

The classical 60/40 investment strategy, where buy-and-hold investors seek stability by focusing on stocks and bonds, is facing renewed scrutiny as markets react to President Donald Trump’s economic policies.

While the approach has weathered market cycles for decades, the recent volatility has raised concerns about its effectiveness in mitigating risk.

The S&P 500 has fallen more than 10 percent since reaching a record high in February, erasing $5.3 trillion in value and officially putting it in correction territory. The Nasdaq has seen an even steeper decline, down over 14 percent from its December peak.

In past downturns, bonds have typically acted as a counterweight to stocks, rising in value as equities declined. However, they haven't been nearly as effective during the recent market movements, holding their value but not delivering the gains needed to offset losses on the equity side.

“Many investors seem to accept it as almost a law of nature that there is positive correlation as they have been conditioned by the last 20 years, which has been something of a goldilocks period,” David Allen, head of long/short strategies at Plato Investment Management, told the Australian Financial Review. “The long view shows it was the exception, not the rule.”

Now, market participants are caught in a tense tug-of-war, grappling with conflicting macroeconomic and trade policy signals. Despite the fact that last week's February inflation print came in softer than expected, bond investors were largely unmoved, with some economists attributing the muted response to trade uncertainty stemming from the White House’s policy shifts.

Most recently, the European Union hit back against a 25 percent levy imposed on steel and aluminum imports, announcing retaliatory measures including 50 percent levies on select American goods. In response, Trump has threatened a 200 percent tariff on European wine and champagne, prompting local distributors to warn of a potentially devastating hit to the industry.

The prospect of further trade restrictions, along with increased spending on national security and defense, has fueled concerns that inflation could accelerate, reducing the appeal of fixed-income investments.

Against that backdrop, investor sentiment in the stock market has weakened significantly. Citing a survey by the American Association of Individual Investors, the Wall Street Journal reported that the share of bullish investors is now at its lowest level since September 2022.

In contrast to previous years when Americans were content to leave their portfolios on cruise control, the Journal said individual investors have begun to trade within their 401(k) accounts at more than four times the usual pace, pointing to data from recordkeeper Alight Solutions.

Financial firms are also seeing increased engagement from investors. TIAA reported a 10 percent uptick in client calls over the past two weeks, with more inquiries coming from investors who previously managed their portfolios without adviser input.

Despite the market volatility, some investors remain committed to a long-term approach. Even with heightened trading activity, transactions in 401(k) accounts still represented just 0.43 percent of total balances, Alight noted.

In an effort to find stability, many have readjusted their proverbial sails, moving funds into cash, short-term bonds, and gold, which has broken past the $3,000 mark in recent days on the back of haven-seeking demand. Net inflows into US-listed gold exchange-traded funds surpassed $5 billion in February, according to Morningstar, with another $1 billion added in early March.

International equities have also drawn fresh interest, with US-based investors putting $1.8 billion into European stock exchange-traded funds in February, according to the London Stock Exchange Group.

For investors, the central question remains whether the current market downturn represents a temporary “growth scare” or the start of a more dramatic economic shift. If Trump’s policies lead to higher inflation, bonds may continue to struggle. On the other hand, if economic growth falters, fixed-income assets could regain their role as a safe haven.