In This Article:
Yahoo Finance host Madison Mills compares how bonds (^TYX, ^TNX, ^FVX) have historically outperformed equities (^DJI, ^IXIC, ^GSPC) during a recession, also examining how the two asset classes stack up to one another in the lead-up to and end of a recession.
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Treasuries may not lead during good times. But when recessions hit, they've historically offered powerful protection for investors. Now our finance Madison Mills joins us now with a closer look in our chart of the day, Maddie.
Bonds, the ultimate protector and the ultimate snoozer for portfolios. I know you don't love to talk about treasuries when big tech is in the room, but trust me, you're going to want to hear this. Take a look at this chart behind me. It looks at the performance of bonds, US treasuries, compared with stocks throughout business cycles. So over here, you've got the start to the midpoint of your cyclical expansion here. Stocks obviously outperforming your treasuries. Then when you go to the middle of this chart on your screen here, you can see that in the midpoint to the end of a cycle of expansion, you start to see a little bit more similarity, but stocks still beating bonds. You're thinking yourself, why do I have this drag on my portfolio? Well, at the end here, you get your answer. Stocks tend to underperform bonds by 13% during times of recession. You can see here bonds outperforming stocks by 19% in a recessionary period. This is all part of what we spoke with Matt Stucky about. He's the chief portfolio manager of equities and Northwestern Mutual Wealth Management. Here's what he had to say.
But let's say, you know, you're a mixed investor, half in equities, half in fixed income. We'd actually recommend a little bit more fixed income above and beyond your target. And the reason being is simply return skew. You know, right now with a 450 10 year, let's call it shock interest rates up or down 100 basis points and look at what happens over the next year in terms of total return. Well, if interest rates go up 100 basis points, you know, you're down roughly 2 and a half percent, but if they go down 100 basis points, you're up roughly 12%. And so the risk return skew there does is attractive.
And Matt making those comments at a really important time in the market. Why is that? Where your 10 year yield hit that critical level of 4.5% today. It actually hit just above that. So when you see yields at those levels, it's really hard to argue against getting into those 10 year notes when you can get a 4.5% clip on them when you have a lot of volatility driving the stock market. We still don't have trade deals. We just have frameworks, talks of deals, and all of that volatility is still in the room for stocks here. Now, it's going to be interesting to note, as Matt pointed out, what happens with the Federal Reserve. Of course, that is a key driver of where we might see the 10 year yield heading. And then of course, I do want to quickly mention the Trump administration Treasury Secretary Scott Besen has said it's his goal to keep the 10-year yield as low as possible. So that is a potential risk for investors. But that really stood out to me, what Matt had to say about how, you know, historically we have a 60-40 spread in a portfolio, but he's recommending an even bigger allocation to bonds going forward because of all that market volatility that I just mentioned.