Will Rising Rates Kill 60/40

Navigating the various cross currents threatening markets.

We are on a road trip in Southern Utah after our annual trip to the Grand Canyon. It is a great thing that we can take these trips personally because of how close to Prescott, AZ (where I live) all these places are and professionally, I can remain connected to the markets. There was a flirtation with the 200 day moving average with one close below it before taking it back on Friday. I have figured out what trade to do if the S&P 500 does breach its the 200 DMA for a second day in a row (this is a catalyst for defensive action in client portfolios). I won't front run that trade but am ready to take an incremental step if need be.

Where the 200 DMA is still sloping upwards I don't think this is the real deal although I do think a topping process started in the spring as I have blogged about several times. The bottom line though will be to stick to my process.

In the last couple of days, I've found a couple of articles related to asset allocation and the problems that 40% to bonds might pose in the context of a 60/40 equities/fixed income allocation.

Barron's had a write up about how to protect against rising rates. Read the article, it's useful but might be overly complicated. Very short term Treasuries now have yields in the mid- to high 2's. I bought some for clients this week. There are various ETFs that offer floating rate exposure and those products are generally have a good year. Over the last year or so I've reduced what little interest rate exposure I've had for clients to now just a little bit and I think that it is not too late for anyone who has not already done so. I've been writing for years about how bad I thought interest rate risk was and while there may not have been much consequence to it, it was still there.

Brett Arends wrote about some of the flaws and drawbacks to the traditional 60/40 portfolio. Again, read the article it is useful but I think portfolio construction needs to involve more than just stocks and bonds provided you're willing to put in the time to manage your portfolio. He talks about periods of high inflation hurting real returns, which it does but this can be mitigated, at least partially, with things like gold, TIPS, other commodities (that's tricky and requires a higher level of time commitment) and possibly REITs (I say possibly as I am not truly sold on this attribute of REITs but I could be wrong).

I still lean to a 60/40 portfolio being able to get it done but it may not be the most efficient route. I am a big fan of alternatives in this context, albeit in moderation, but it is my job (literally) to commit a lot of time to managing portfolios and avoid or at least partially mitigate obvious threats like in this case a stretch where 60/40 might not be the most effective path.

The picture accompanying this post is from Bryce Canyon National Park. We've been three times now. It is one of my favorite parks along with Canyonlands also in Utah as another favorite. I love a lot of the parks we've been to but these two stand out to me. I would encourage everyone to research and then visit some (all?) of the parks, monuments and everything else in northern Arizona and southern Utah. We are checking out the Grand Staircase National Monument for the next couple of days, we saw some of it yesterday driving on Hells Backbone Road and doing one short hike late in the day, pictures below. All the stuff I write about in terms of taking care of yourself financially and physically is to be able to do what you love which in our case includes these hikes and seeing this scenery.

Hells Backbone Rd

Hiking to Calf Creek Upper Falls

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