January 08, 2024

While the outlook was doom and gloom for most of last year, stocks did great. The S&P 500 was up almost 25.0% in 2023.

The popular “60/40 portfolio,” which consists of 60.0% stocks and 40.0% bonds, had a terrible year in 2022, losing 15.8% according to Morningstar. Conversely, last year was one of its best in three decades, gaining roughly 16.0% for the year (and 12.0% in November alone).

This might make one think the market is on firmer ground. It may be, but it’s still wise to proceed with caution. The fact is, the most intense market rallies often occur in bear markets, not bull markets.

According to Bank of America strategist Michael Hartnett, the biggest monthly surges in the 60/40 portfolio typically precede pullbacks. Also, Bloomberg reports the 60/40 portfolio has returned 12.0% or more in a month just 10 times since 1980, and frequently it was a sign of nearing recession.

For instance, the 60/40 portfolio surpassed gains of 12.0% twice in 1980, right before the worst U.S. recession since World War II. It exceeded that threshold again in the downturns of 2000, 2008, and 2020. In that context, November 2023’s gain doesn’t necessarily bode well.

As hopeful as the recent gains might feel, they could be setting the stage for a big downturn. Signs of an unhealthy economy exist. For example, banks aren’t lending at full capacity, more companies are going bankrupt than last year, and folks are facing more debt than ever before.

So, this market rally and the success of the 60/40 portfolio could be masking some deeper economic challenges.