Wall Street’s ‘80/20’ shift finds fresh fuel in stock bounceback

As per the latest business developments, Wall Street spent another week watching yields hit multi-decade highs, oil hold above $100 and the case for tighter The US central bank policy harden. Once again, risk assets refused to break.

Equities closed not far from records and corporate-credit spreads stayed in check, even as the global bond selloff roared for most of the week and inflation fears returned to the center of the market.

But those worries were at least temporarily kept at bay by faith in the AI-fueled earnings and economic resilience that keep rewarding equity exposure. Talk of a potential US-Iran breakthrough to open the Strait of Hormuz pulled down oil on Friday, helping drive the Nasdaq 100 up 3.3% in its biggest weekly gain since early August. Meta Platforms Inc. was a standout, rallying nearly 13% on the release of its Muse AI tool.

Yet behind it all lurked waning consumer confidence that darkened the outlook and the still-lingering inflation risks that the current week hammered Treasuries, one of the usual refuges from stock-market risk.

Some money flowed into new forms of cover. Around $2.7 billion has gone into the Schwab US Dividend Equity ETF so far in September, putting it on pace for its 10th straight month of inflows, while JPMorgan’s two big option-income ETFs drew roughly $800 million combined. The iShares Global Infrastructure ETF took in another $150 million. Some set-income managers, in the meantime, are staying closer to the front of the curve.

None is a traditional bond substitute. But they offer pieces of what market participants are looking for these days: income without taking long-duration risk as shorter yields near 5%.

“Market participants are actively looking at that proverbial 40% of their 60/40,” stated Adrian Helfert, chief investment officer at Westwood, which oversees roughly $18 billion. “I can get a good income from dividend- or option-income rather than holding that duration risk. So we’ve reduced that longer-end risk for portfolios.”

Within ETFs, at least, the textbook 60/40 already looks more like 80/20. Equity ETFs account for roughly 80% of all ETF assets, one of the highest shares on record, versus around 16% for set income, according to Bloomberg Intelligence. Much of that skew is performance rather than investor choice. Stocks have simply outrun bonds, while new money is still arriving in proportions much closer to the traditional split.

Whatever the intent, ETF market participants are still heavily tilted toward equities, despite speculation the bond market could siphon money away from stocks as yields hold at marks not noted since the Global Financial Crisis.

“If yields are rising because expansion is stronger, then the traditional diversification benefits of bonds may be less reliable, particularly during periods when both expansion and inflation expectations are moving elevated,” stated Seema Shah, chief global strategist at Principal Asset Management. “That’s one reason market participants are considering a broader opportunity set.”

Westwood’s Helfert, for one, sees the income of bonds at current yields as enticing. What he is less willing to do is take a lot of duration risk to get it. “Treasury yields are compelling — you’ve got a 10-year that’s trading now significantly above 5%. But the rate of change has been scary,” he stated.

That’s because it has rapidly fuelled down the prices of long bonds. A basket of long-duration bond ETFs tracked by Baird Strategas attracted roughly $224 billion over its lifetime, but only holds around $182 billion today, a measure of the sweeping market selloff. Of the four categories Todd Sohn at the firm tracks for the calculation, the long-duration one has been the biggest destroyer of investor cash.

The 30-year Treasury yield hit 5.53% the current week, its highest since 2004, while the five-year topped 5% for the first time since 2007. Brent crude advanced above $106 and bond volatility jumped. The S&P 500, in the meantime, notched its first positive week since the start of the month.

Garrett Aird, vice president of investment management research at the $461 billion Northwestern Mutual Wealth Management Firm, stated his team has repositioned set-income allocations across various portfolios they oversee. They’ve been boosting exposure to real estate investment trusts, as well as so-called liquid alternatives, which includes managed-futures, merger-arbitration and long-short strategies.

“Providing a little bit more diversification within that set income is the whole idea of how we’re trying to construct the portfolios,” he stated in an interview. “The most critical piece is finding strategies that provide an uncorrelated return stream — so finding strategies that aren’t correlated to equities, that aren’t correlated with set income is key.”