October Marked the 13th Time in the Past 34 Months That Bonds Declined Alongside Equities. We Need Another Solution to Bonds

The VIX finished October at 23.6, slightly higher than earlier in the year but still well within historical levels and showing that the August blip was indeed a blip.  Interesting enough, to start November, the VIX dropped considerably following the election and as of 11/6 was at 16.27.

For the month, the S&P 500 finished down -0.91%, the AGG down -2.48%, and a 60/40 portfolio down -1.54%.

The month also reinforced an ongoing challenge investors face in the current market environment – the diminishing effectiveness of bonds as a diversification and hedging tool. October marked the 13th time in the past 34 months that bonds declined alongside equities, a stark contrast to the previous 13 such concurrent declines needing a full 100 months (3 times as long) to occur.

Historically, stocks and bonds rising at the same time is quite common:

% of Years Stocks & Bonds Rise Together
1930s	40%
1940s	70%
1950s	30%
1960s	60%
1970s	60%
1980s	70%
1990s	70%
2000s	50%
2010s	75%

However, stocks and bonds both declining at the same time is quite rare. In fact, it has only occurred 3 times since 1928! 1931, 1969, (almost 2018) and 2022. At the end of October, the AGG was in positive territory at +1.86% for the year. It would seem that it will be positive for the year, however, we are seeing more frequent examples of bonds not necessarily being a balance to equities.

What happens to the 60/40 approach in the next large market decline in such a scenario is a question investors should be asking.  One idea is to pair exposure to market upside through futures and options-based market participation strategies with appropriate VIX-based hedges. If you can generate income through option writing, so much the better!