Bonds as a hedge against stock market losses…will it work?
Analyst and long-time market commentator Mark Hulbert noted this week that despite this past month’s price action, bonds are still a hedge against stock market losses.
Hulbert pointed out that this month’s steep market decline also saw bond prices fall as well, spreading worry that in the “new normal” bonds may not serve as the protection for the stock market as well as they have traditionally.
Hulbert believes that worry is unjustified, noting that while rare, the phenomenon of both stocks and bonds dropping in tandem is not unprecedented.
Since 1926, both the S&P 500 and intermediate-term U.S. Treasury bonds have fallen together 12.4% of the months, or an average of once every eight months. Investors, he says, are being unrealistic if they “expect bonds—or any hedge, for that matter—to work every time, all the time.”
And while I respect Mark Hulbert’s research, I caution anyone reading this to realize in a rising interest rate environment like we have now, the chances of bond prices falling is going to have much more to do with the rising interest rates than whether the stock markets are going up or down.