It’s Been All About The Bonds

Published On: January 29, 2024

Written by: Ben Atwater and Matt Malick

Stocks are exciting. They get all the attention and they steal the headlines.

Bonds are boring. They are usually less volatile than stocks and they can be difficult for the public to understand, so the media steers clear.

You may have heard . . . that stocks are making new all-time highs.

The Standard and Poor’s 500 Index finally surpassed its prior high, establishing a “new bull market.” This came after more than two years. The last high was January 3, 2022.

It was a wild ride. 2022 was miserable for stocks. And then in 2023 stocks staged an unanticipated, but impressive rally. (Another great reminder to ignore the pundits at all costs as nobody thought stocks were going up in 2023.)

While stocks have recovered, bonds have not.

2022 was not only a historically bad year for stocks, but it was for bonds too. Never in our careers have stocks and bonds performed so miserably together. In fact, it is often the case that when stocks perform badly, bonds tend to perform well and pick up some of the slack. Instead, in 2022, bonds added insult to injury.

Below is a chart of the S&P 500 Index and of the Bloomberg Aggregate Bond Index, the two benchmark indexes for their respective asset classes, from the January 3, 2022 high in the S&P 500 until now.

As you can see, stocks are flat after more than two years of volatility, while bonds have yet to stage anything close to a full recovery after their two years of volatility.

Even though stocks get all the attention, performance for balanced portfolios (most portfolios own stocks and bonds) has been more about the bonds than the stocks.

It is our view that downside protection is more important than capturing every ounce of upside. This plays into our investment philosophy across asset classes, including bonds.

That is why we build shorter maturity bond ladders for most clients. Bond laddering is buying bonds with staggered maturity dates; reducing the reinvestment risk of those maturities; providing systematic liquidity; and protecting principal as bonds mature at par value regardless of the price swings during the holding period.

Thanks to our conservative approach to fixed income, when interest rates rose rapidly in 2022 and the bond market crashed, we needed Band-Aids, not tourniquets.

If this ends up being a new, durable bull market (anyone’s guess), we believe we are ready to continue the climb, with ropes and harnesses, no “free solo” for us.