In the summer of 1982, Duran Duran was atop the music charts, Leonid Brezhnev was still calling the shots in the Soviet Union, and the United States was just coming out of a decade-long economic slump. Back then, the S&P 500 stood at 105.
Fast forward to 2015, and that market index has surged nearly 2,000%. A multi-decade plunge in interest rates has led to stellar returns for bond investors as well. Despite some notable bumps in the road in 2000 and 2008, the bond and stock markets have delivered remarkable long-term returns, enabling many baby boomers to build powerful retirement nest eggs.
Yet few expect the stock and bond markets to deliver such robust returns in the years ahead, and for many the question is whether the remarkably long bull market in stocks and bonds will end with a whimper or a bang.
At this point, a quick history lesson about stocks and bonds is helpful. From the 1960s through the end of the 1970s, “stocks and bonds were negatively correlated,” notes Jeff Sarti, co-president of Morton Capital Management. Since the early 1980s, however, these two asset classes have often moved in lockstep. They have both benefited from falling inflation, rising corporate productivity and, more recently, a fire hose of liquidity from the Federal Reserve.
A changing Fed stance regarding liquidity may have an equally deleterious effect on both asset classes. “We’re very concerned about central bank policy. … We’ve had a free lunch thus far,” says Sarti, adding that if stocks lose ground, “bonds are unlikely to be the diversifier they once were.”