Higher Rates ‘Single Best Development’ In 20 Years: Vanguard
"Higher interest rates are here to stay."
So declared Vanguard, staid bastion of relative sanity where I've always parked a considerable sum of my own money. There's something oddly comforting about a firm that still requires some documents be hand-signed (with an actual ink pen) and hand-delivered (via physical mail).
Normally, I wouldn't mention a year-ahead piece from Vanguard, but their 2024 outlook was notable for what the firm said about the epochal shift away from the easy money era and
Stock picking, based on fundamental analysis (which historically been my comfort zone), is hopefully going to make a return to the investment scene in 2024.
Already doing my preliminary research. I like profitable companies on the verge of making even more profit that have gotten “hammered” for what I contrarily believe to be short term/incorrect rationale.
I’m not convinced that the 60/40 portfolio offers diversified returns anymore. As you point out, we haven’t seen a negative correlation in quite some time and it’s hard to see what circumstances would cause stocks and bonds to diverge going forward. If we go into a recession, rates go down unless it’s stagflation, but the Fed likely wouldn’t raise rates in a steep recession/depression scenario. If rates do go down as we’d expect in a recessionary environment, investors will pile into stocks knowing the Fed put is in full effect while bonds naturally go up as well.
I do agree with Vanguard that now is a good time to load up on stocks and bonds. Seems like a lot of banks are talking about insurance cuts next year, but as the old adage goes, rates take the escalator up and the elevator down. That’s why I predict that the everything rally will return with a vengeance in 2024.
Twenty-five percent of my assets reside with Vanguard, all in fixed income Admiral shares, a legacy from an earlier time. I am technically under water on all of this but yields are rising and will continue to do so. While the correlations between stocks and bonds are not negative, as they have been, I consider the 60% bonds, 25% equities and 15% cash I hold a diversification of my risk. The truth is, I receive cash income from the FI assets of over 6%, versus 5.5% on the equities and 5.25% on the cash. While there are unrealized losses in my assets, my income has risen every year since I retired in 2007. My portfolio has risen 3.5% this year as well. For a 79 year old, I’m happy. The Vanguard stuff is all government and will keep paying steady to rising returns and 40% of it is tax-exempt. Cross asset correlations may not reflect strict diversification, but the nature of the various assets carries useful protections and achieves my goals.