Powell’s Jackson Hole Speech: Bad News for 60/40 Investors

When Federal Reserve Chairman Jerome Powell spoke Friday, he created a deeper hole in a time-tested investment strategy. At least for a while longer.  

The 60/40 portfolio likely suffered another setback, as his much-anticipated talk at the annual economic policy conference in Jackson Hole struck a hawkish tone.  

The takeaway from Powell’s message to investors is that the Fed’s focus remains on preventing the reacceleration of inflation. That may temporarily dash the hopes of financial advisors who hoped to see the 60% stock/40% bond asset allocation return to form.  

Regardless, if stock and long-term bond prices continue to stagnate or decline further, that traditional 60/40 mix doesn’t have a leg to stand on. 

The 60% stock portion faces a volatile, skittish but ultimately flat market. Embedded in the S&P 500’s return of about zero over the past two years is a reminder of the market’s cyclical nature. While the S&P 500 has soared 760% since its March 2009 financial crisis bottom, it lost 37% in the decade before then. 

Powell’s Speech and the 60/40 Portfolio 

Advisors and investors are focusing on the bond market, for good reason. Rates have gone from near zero to over 4% across the Treasury yield curve in under two years. But the Fed’s inflation stance means continued interest rate risk to the longer-term bonds that drive long-term returns on the bond side of the 60/40 portfolio. 

iShares essentially provides a benchmark for 60/40 via the iShares Core Growth Allocation ETF (AOR). Since the start of 2021, its return is also near zero (0.7%). So, the question for advisors following the latest Fed-speak is this: How long will the stock and bond markets stay stagnant, or weaken?  

Amid that uncertainty, ETFs offer a vital outlet, with a range of ways to construct your own asset allocation and rotate it as you wish at different points of the market cycle.  

Or you can outsource that task. For instance, the STF Tactical Growth & Income ETF (TUGN) is one of a growing number of ETFs that apply active management to the standard stock/bond asset allocation approach. At 15 months old and with $38 million in assets, the fund’s twist on the classic approach is for the equity portion to track the Nasdaq-100 index, and supplement that with T-bills, currently with about an even mix of the two. That has paid off in 2023, with TUGN up 25%. 

Powell’s Words Put Focus Back on Portfolios 

And with short-term U.S. Treasuries still offering strong yields with minimal risk, funds like the US Treasury 12-Month Bill ETF (OBIL) offer a way to get the “bond” part of the 60/40 filled temporarily, while the picture gets clearer for Powell, his Fed board mates, and the markets. OBIL has $121 million in assets and as its name implies, holds the current 12-month T-bill, which currently yields over 5.3%. 

For nearly two decades, investment advisors and self-directed investors came to understand and appreciate “asset allocation” as a complementary combination of stocks and bonds. When rates were falling, bond prices were rising and the stock market was driving higher in those easier credit conditions, that combination worked very well.  

Powell’s latest message prompts advisors and investors to focus their attention on what to do about their portfolios, with the possibility of a quick Fed rate cut likely off the table, unless it’s in response to a financial crisis.  

With so much money and sentiment having rallied around the 60/40 concept until both stocks and bonds fell in tandem in 2022, the potential for a profitable restart just took a hit. It is up to advisors to adjust to that.