So far this year, an investor in a portfolio of 60 per cent global equities and 40 per cent government bonds would have lost a bruising 14 per cent. This is a far cry from the 9 to 10 per cent they would have grown accustomed to making on average over the past four decades.
These losses would also be the steepest incurred over this period — even if less bad than at the low point in June when they stood at almost minus 20 per cent. Has the sweet spot afforded by a “60/40 book” since the mid-1980s — one characterised by firm double-digit positive returns and much less volatility than investing in equities alone — turned sour?
There are reasons to argue it may have done. As central bankers reminded us at Jackson Hole last week, inflation is back to average rates last seen between the early 1960s to mid-’80s, and monetary policy is tightening aggressively. Labour bargaining power has returned for the first time since that period and, along with fiscal profligacy and fragmenting global supply chains, it is challenging the structural forces that preserved a four-decade bull run in government bonds.