Cooling Inflation Paves Way for Fed Downshift
US consumer inflation decelerated for the sixth consecutive month in December, paving a path for the Federal Reserve to further slow its pace of rate hikes.
The 60/40 portfolio delivered its worst annual performance since the global financial crisis in 2022. In fact, last year was the worst on record for US bonds dating back to 1794, according to research by Santa Clara University emeritus professor Edward McQuarrie. As a result, investors are facing the possibility of a sea change in portfolio construction. Was 2022 merely a blip on the radar, or did it portend a new era ahead? While it failed to provide a hedge against falling equities, the bond market’s dismal 2022 has driven yields sharply higher, drawing a rosier picture for potential returns going forward. According to the most recent Capital Market Assumptions from PGIM Quantitative Solutions, the 10-year outlook for a global 60/40 portfolio has improved from around 5.7% at the end of 2021 to around 8.4% currently.
Research from PGIM Institutional Advisory & Solutions found that diversified portfolios still have a critical role to play. Even if changes in the macroeconomic landscape lead to persistently positive stock-bond correlation, the benefits of a balanced portfolio of stocks and bonds are expected to endure.
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US consumer inflation decelerated for the sixth consecutive month in December, paving a path for the Federal Reserve to further slow its pace of rate hikes.
The big question facing the US economy heading into the new year is whether it will formally enter a recession amid elevated inflation and higher rates.
Despite recent improvements in inflation data, the Fed doused market hopes for a more dovish tack ahead.