The US dollar could be a good addition to 60/40 portfolios for investors nervous about the risk of stocks and bonds falling in tandem, says Christian Mueller-Glissmann of Goldman Sachs Research.
Mueller-Glissmann, head of asset allocation research within portfolio strategy, points out that the correlation between stocks and bonds has risen substantially since the pandemic. “This means holding a 60/40 portfolio has gotten more risky, because bonds are less likely to buffer equities when they fall,” he explains.
Equity/bond correlations have started to decline recently, after inflation started normalizing last year. But sticky inflation remains a risk, and would likely cause the Federal Reserve to hold off on significant rates cuts. “That would be bad news for bonds, of course, but it could also weigh on economic growth and equity valuations eventually,” Mueller-Glissmann says. “That’s not our base case, but it’s definitely something multi-asset investors are worried about.”
One good hedge in this situation would be the US dollar, he says. The dollar would benefit from persistently high US rates, and its safe-haven status means it could do well in the case of a global economic slowdown. In addition, it might benefit from rising uncertainty around US elections.
“For nervous 60/40 investors,” says Mueller-Glissmann, “the dollar could be a good portfolio addition.”