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The first half of 2022 saw the second-worst performance of a 60/40 portfolio of stocks and bonds in over two centuries. Despite this, however, something still holds true: In combination, stock and bond markets naturally form an equilibrium.
Reaching a “new normal”: Between tumultuous activity, inflation and the Fed raising interest rates, it’s been a hard-hit year for many. Additionally, the Fed has been in talks of bringing down the money supply, while also letting “their $9 trillion portfolio of Treasury and mortgage bonds mature without replacing them with new bonds.” As a result, worldwide banks and investors have learned to adjust to our new “equilibrium”, which becomes a continual oscillation (up and down, back and forth), or a process which we never finish going through.
Building up for a bounce-back? As blogger Joshua Brown says, “Volatility in the investment markets is a sort of damped oscillation in which the force that caused the volatility cannot be sustained indefinitely.” This is due to investment demand. Eventually, investors need returns above what the risk-free rate can provide, and a reversion occurs. Trillions of dollars need a home, a new stock-bond mix of risk and security is found and we find an equilibrium in which we can all breathe.
Don’t put the cart before the horse: The market hasn’t officially “bounced” toward a recovery, and you shouldn’t take it as such. There are more forces at play in the short-term that should be considered.