When stocks and bonds retreat in sync, review your strategies

Brightly colored line charts track together on a smart phone screen.

We don’t think diversified investors should abandon their asset allocations, but adjustments may be in order.

photo of Luis Alvarado, Investment Strategy Analyst, Wells Fargo Investment Institute
Luis Alvarado,
Investment Strategy Analyst,
Wells Fargo Investment Institute

In my mind, there’s nothing quite like a day at the beach. Fortunately for me, during my youth in Costa Rica, my time in Los Angeles, and now here in San Francisco, there’s been a beach nearby. Along with days in the sun, I have, of course, experienced the disappointment of dashed expectations when thunderstorms rolled in and upset the day’s plans.

Investors who’ve diversified their investments to include both stocks and bonds must be feeling a similar emotion when they look at their portfolios’ performance. And why not? It takes time and effort to build a diversified portfolio with the idea that when stocks zig, bonds will zag and help smooth out overall performance. And now after all that, you have a period like this year’s first half when both asset classes declined. Hence, you may have investors feeling like it’s a rainy day at the beach.

During this period of rising interest rates and persistent inflation, let’s take a look at past periods when stock and bond prices retreated concurrently for potential insights and discuss implications for investors.

What does history tell us?

It appears this unusual period took many investors by surprise. Typically, during stock market sell-offs, investors have tended to move to bonds as a perceived “safe haven” asset, driving bond prices higher and yields lower. However, during the year’s first half, this trend was broken, leading some investors to rethink the value of owning bonds as a portfolio stabilizer.

Historically, a combination of equities and fixed income has, as a general rule, enhanced diversification benefits for a portfolio. Bond prices typically have been more stable than equity prices; this relative stability has often helped insulate a portfolio during times of market stress and smoothed out performance over time.

For a closer look, we at Wells Fargo Investment Institute used the Ibbotson Associates Stocks, Bonds, Bills, and Inflation (IA SBBI) U.S. Long-Term Government Bond Index and the IA SBBI U.S. Large Stock Index as proxies and found only six calendar years since 1929 in which both stocks and bonds declined on an annual basis: 1931, 1946, 1969, 1973, 1977, and 2018. Based on these results, you might think that stocks and bonds have declined in lockstep:

  • During periods of extreme economic hardship (like the 1931 Great Depression)
  • When there’s been abrupt increases in inflation (like in 1946 and 1977)
  • In run-ups to an economic recession (like in 1969 and 1973)
  • During Federal Reserve (Fed) tightening cycles (like in 2018)

But drawing conclusions based on such a small sample size can be misleading; during other periods with similar macroeconomic conditions, the return performance results did not always react the same as in these particular years.

In addition, performance figures differ if you use a different index to measure returns. Many fixed-income investors today hold portfolios with a diverse mix of bonds beyond long-term U.S. government securities. With that in mind, we used the Bloomberg U.S. Aggregate Bond Index since its inception in 1976 as a proxy and found only four calendar years with annual negative returns: 1994, 1999, 2013, and 2021. Yet, none of these years coincided with negative returns for U.S. equities on a total return (market price movement plus dividends) basis.

In our view, both U.S. equity and fixed-income markets have experienced significant declines this year largely due to persistent levels of inflation and a fragile post-pandemic economy aggravated by an aggressive Fed tightening policy coming out of the extended period of all-time low interest rates. We expect this trend to continue in the near term.

Investment implications

Much of the time, investing with the expectation that bonds will zig when stocks zag has been key to successful asset allocation. However, this year’s first half was not one of those times, and it’s difficult to predict how long these rainy days will continue. We believe several macro trends contributed to what’s happening, including rising yields, elevated inflation, a slowing economy, supply-chain disruptions, the war in Ukraine, and lockdowns in China.

Stocks and bonds may continue to underperform as rates rise further and growth wanes. We believe having a diversified portfolio that includes exposure to commodities that tend to rise with inflation and, for qualified investors, alternative investment strategies with low correlations to stocks and bonds, like Relative Value and Macro, can help hedge against losses and may help insulate portfolios from further rate hikes.

Rather than abandoning your asset allocation, I encourage you to reach out to your investment professional for questions about how to position your portfolio in today’s unusual market environment.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

All investing involves risks, including the possible loss of principal. Past performance is no guarantee of future results.

Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss, including in a declining market.

Stocks may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Bonds are subject to interest rate, credit/default, liquidity, inflation, and other risks. Prices tend to be inversely affected by changes in interest rates.

The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value, which may result in greater share price volatility.

Alternative investments carry specific investor qualifications, which can include high income and net-worth requirements as well as relatively high investment minimums. They are complex investment vehicles, which generally have high costs and substantial risks. The high expenses often associated with these investments must be offset by trading profits and other income. They tend to be more volatile than other types of investments and present an increased risk of investment loss. There may also be a lack of transparency as to the underlying assets. Other risks may apply as well, depending on the specific investment product.


Bloomberg U.S. Aggregate Bond Index is a broad-based measure of the investment-grade, U.S.-dollar-denominated, fixed-rate taxable bond market.

Ibbotson Associates Stocks, Bonds, Bills, and Inflation U.S. Large Stock Index tracks the monthly return of the S&P 500 Index. The history data from 1926 to 1969 is calculated by Ibbotson.

Ibbotson Associates Stocks, Bonds, Bills, and Inflation U.S. Long-Term Government Bond Index measures the performance of a single issue of outstanding U.S. Treasury bond with a maturity term of around 21½ years. It is calculated by Morningstar, and the raw data is from The Wall Street Journal.