A key challenge for the 60/40 portfolio has been the weakening of the stock-bond relationship that has historically supported diversification. This reflects a broader shift in market structure from the post-GFC environment, when macroeconomic shocks were largely demand-driven. Today, the environment is shaped by persistent supply-side disruptions, including the pandemic and subsequent geopolitical events that have contributed to higher energy costs and broader price pressures.
The nature of these shocks matters for the role of bonds in portfolios. In demand-driven slowdowns, bond prices typically rise as yields fall to support economic growth, helping to cushion losses in risk assets. Supply-side disruptions can have the opposite effect, with bond prices falling and yields rising in response to price pressures, reducing their ability to provide diversification. With inflation remaining persistently above target, the scope for central banks to lower interest rates is greatly reduced, even as equity markets decline in response to these shocks. As a result, bonds have been less effective in providing diversification during periods of equity market stress.
While bonds have at times regained their diversifying characteristics in recent years, this relationship has become less reliable in a macro environment shaped by persistent supply constraints. Episodes of renewed inflation concerns have led to both asset classes declining in unison, with the Iran oil shock providing a recent example. March marked the second weakest month for 60/40 portfolios since the drawdowns of 2022, as markets initially reacted to the inflationary impulse by pricing out expectations for rate cuts and shifting toward a higher-for-longer rate outlook, with less immediate focus on longer-term growth risks that can emerge if price pressures begin to weigh on economic activity.
The chart below shows how the role of bonds as diversifiers has changed in the post-COVID period. Since 2020, bond market returns have been negative in 17 of the 19 months when equities declined by 2% or more, including most recently in March 2026.
