Tuesday 10th of September 2024
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This past summer, stock markets went on a wild ride, leaving many investors confused about what was happening. In simple terms, some weak economic data from the US triggered a wave of selling, making things look worse than they really were. But within a few days, the markets bounced back to nearly where they started. It was a typical case of summer market fluctuations, where lower trading activity can lead to bigger swings.
One positive takeaway from this situation is that the financial “safety net” worked as it should. When stocks dropped, bond prices went up, which helped cushion the impact for investors. This balance between stocks and bonds is a classic strategy, known as the 60/40 portfolio: 60% stocks and 40% bonds. It’s designed to protect investments during tough times.
This strategy took a hit in 2022 when inflation soared, causing both stocks and bonds to lose value at the same time. That left investors with nowhere to hide. But now, with inflation somewhat under control, the concern has shifted to the possibility of economic slowdown, which is where bonds typically shine.
Bonds are currently offering some of the highest yields (returns) we’ve seen in years. Not long ago, bonds were yielding almost nothing, and in some cases, investors were even losing money just by holding them. That strange period is over, and now, the benchmark 10-year US government bond yields around 3.8%, which is quite decent compared to recent years.
Experts like Simon Dangoor from Goldman Sachs suggest that bonds could once again provide protection against stock market declines, especially if interest rates start to drop. But there’s a catch. This isn’t the first time we’ve heard that “bonds are back,” and it hasn’t always turned out well, especially when inflation proves hard to control.
While some analysts are cautious about getting too excited over bonds, saying they aren’t the “free ride” they used to be, the fact that the financial system’s safety net held up during this summer’s market turmoil is reassuring. It shows that having a balanced investment strategy with both stocks and bonds can still help navigate through uncertain times.
While the recent market craziness might have been unsettling, there’s no need to panic. The safety mechanisms in place worked well, and for now, investors can take comfort in knowing that their diversified portfolios are designed to withstand such shocks.
We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.
Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.
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