The 60/40 portfolio 'is in danger' as Federal Reserve gears up for a rate-hike cycle in coming months

The traditional portfolio mix of 60% stocks and 40% bonds, historically seen as the safest allocation for investors of moderate-risk tolerance, “is in danger” as the Federal Reserve gears up for its first interest rate hike campaign since 2015-2018, according to JPMorgan Chase & Co. analysts.

“The market’s biggest worries seem to now be revolving around the Fed and the implications of rising rates,” JPMorgan strategist Thomas Salopek and others wrote in a note released Wednesday. In their view, there’s still “a substantial catchup that needs to happen in rates markets.” Moreover, the market’s expectations for where the Fed’s rate-hike cycle ultimately ends up “have room to rise further.

Jeff deGraaf, founder of Renaissance Macro Research, wrote in a Wednesday note that “the higher the level and the faster the surge in rates, the worse the returns” for the S&P 500 SPX in the next six months.Fixed-income investors face “one of the most challenging” backdrops in recent history, Salopek and the other JPMorgan strategists wrote. Meanwhile, “equities should be able to withstand policy normalization,” though “the impact on sectors will be far from uniform.

“Calls for the demise of the 60/40 portfolio have been correct for years,” said Phillip Toews, the New York-based chief executive of Toews Asset Management, which oversees $1.3 billion in assets. “The demise has just been delayed due to the availability of easy money from the Fed.” The formula was called into question again in mid-2020 as the 10-year Treasury yield hovered just above zero, and seemed likely to stay there. At the time, Jan Loeys of JPMorgan suggested investors adopt a portfolio that’s 40% stocks, 20% bonds and 40% invested in securities with some characteristics of both. Those would include collateralized loan obligations, commercial mortgage-backed securities, real estate investment trusts or utility stocks.

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