Last year was a veritable disaster for pretty much any version of the vaunted 60/40 portfolio.

An entire generation of investors came to view that simple split as infallible, and the underlying correlation assumption as an inviolable rule.

Of course, there’s no such thing as a divine principle. And even the most trustworthy correlations can go bad.

In 2022, stocks and bonds fell together, resulting in what, prior to Q4’s rebound (which itself fizzled in December) was a $35 trillion wipeout across equities and bonds.

The chart above shows the scope of the bloodletting as it stood just prior to October’s stabilization in terminal rate pricing, which helped calm rates volatility and set in motion a rebound in equities and an intense bout of dollar weakness, both of which are by and large ongoing.

It was highly unlikely that 2023 would be as cruel to multi-asset investors as 2022 (and here I’m using a narrow definition of “multi-asset” — if you had commodities last year, you did ok).

Stocks do occasionally fall for consecutive years, but it’s rare, and 10-year US government bonds (or their equivalent) have never logged three consecutive years of negative returns in the entire history of America’s republic.

Given that, it’s perhaps not surprising that simple 60/40 portfolios are off to a fantastic start. In fact, according to BofA’s Michael Hartnett, YTD returns for 60/40 portfolios have rarely done so well.

Looking back a century, there were only nine instances of 60/40 portfolios faring better during the first six weeks of a calendar year than they have so far in 2023.

“We believe bonds will have a tough decade but they will post positive returns” this year, Hartnett said, adding that a cyclical 2023 bond bull makes a major stock market bear decline unlikely until a hard landing in GDP and EPS.”

That’s an important point. Rates were the sponsor of last year’s risk event. Falling bond yields (and rates vol) can bolster equities in 2023 up to and until any decline in long-end yields is indicative of outright recession.

Annualizing 2023’s YTD 60/40 performance would mean a 48% return, the best year in modern history for that simplest of simple diversification strategies.

Hartnett employed some humor:

Once upon a time an English strategist moved back to London with a wife from New York; after three years someone asked the wife ‘What’s the best thing about living in London?’ The wife replied ‘Paris.’ And what’s the best thing about stocks in 2023? Bonds.