Bonds are still a hedge against bad times in the stock market

VaselineAugust 11, 2024

0 3 minutes read

Bonds are still a hedge against bad times in the stock market

Diversified investors faced one of the worst bear markets ever in 2022.

The stock market decline wasn’t great, but not out of the ordinary when it comes to bear markets. It was relatively calm compared to the worst accidents in history.

The average bear market since 1928 is a loss of over 36%, so the 25% reduction from peak to trough in 2022 was not the end of the world.

What made the 2022 bear so devastating was the bond portion of the portfolio. Typically, when stocks fall, high-quality bonds act as a portfolio stabilizer. This time, the bonds were reason stocks fell.

Here’s a look at how bonds (10-year Treasuries) have performed every time the S&P 500 has had a down year since 1928:

Bonds are still a hedge against bad times in the stock market

Bonds have fallen in the same year as stocks a few times before¹ but those fixed income losses were insubstantial. There he had not it was a year where stocks and treasuries simultaneously fell by double digits.

It was brutal.

This type of environment could happen again in a rapidly rising rate environment, but you can see from the chart that 2022 was an outlier, not the norm.

The average year down for the US stock market is a loss of nearly 14%. During those same down years, Treasuries averaged a gain of more than 4%. And that number includes the downright awful year that was 2022.

Most of the time, bonds act as a good hedge against bad years in the stock market, even if they are not a good hedge against bad years in the stock market all the time.

Unfortunately, there are no perfect hedges. Nothing always works the way you want it to.

This is the risk for you.

There are exceptions to every rule.

If we find ourselves in a situation where the economy slows, disinflation (or even deflation) is the current trend, and we finally enter a recession at some point, high-quality bonds will likely provide diversification benefits.

Bonds are yielding again.

There are no guarantees. Rising rates and inflation are not a great combination for bonds.

But high-quality fixed income can help protect your portfolio from stock market volatility and recessions, if and when they hit again.

Further reading:
Fixed income has income again

¹In 1931, 1941 and 1969.

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VaselineAugust 11, 2024

0 3 minutes read

Vaseline

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