🔬 The Demise of the 60/40 Portfolio?

"Experience is what you got when you didn’t get what you wanted"
- Howard Marks

“A clear conscience is a sure sign of a bad memory.”
- Mark Twain

US equities finished mixed on Thursday, with major indices still tracking for weekly gains: Mag 7 stocks outperformed alongside semiconductors (Taiwan Semiconductor), asset managers (Blackstone), and insurers (Travelers), while laggards included Medicaid MCOs , transports, and homebuilders struggling under rate pressure. Treasuries weakened, the dollar strengthened, and WTI crude remained volatile, still set for a 6%+ decline this week.

Earnings results and AI-driven growth boosted momentum, while mixed cyclical performance tempered gains: Taiwan Semiconductor posted strong earnings, leading semiconductors to their best session in weeks, while Blackstone also reported upside. .

Economic data showed signs of resilience despite some soft spots, while Europe and China developments were closely watched: Retail sales beat expectations, and homebuilder sentiment improved, though industrial production lagged. The ECB delivered a rate cut, as expected, while markets kept an eye on China's Q3 GDP and activity data for further clarity.

Notable Companies:

• Taiwan Semiconductor (TSM) [+9.8%]: Strong profitability on better margins and cost control, with Q4 sales guidance far exceeding expectations, boosted by growing AI demand.

• Blackstone (BX) [+6.3%]: Q3 earnings and revenue topped estimates with $41 billion of inflows, as the company hinted at plans to take some investments public soon.

• Expedia Group (EXPE) [+4.8%]: Reports suggest Uber is exploring a possible acquisition, but discussions are still at an early stage with nothing formal yet.

• More below in ‘Market Movers’.

IMPORTANT UPDATE:

Dear Friends,

Starting next week I will begin publishing StreetSmarts as a weekly Saturday morning newsletter instead of every week day. I love writing StreetSmarts but you can imagine having to publish something everyday can be difficult. I also find my self limited in the depth and scope of what I can get into since I don’t think too many people want to get too in the weeds before work while having their morning coffee.

I am also really looking forward to tackling more stuff throughout the week, like company deep-dives and videos, which I will of course share with all of you.

One thing I am worried about is that email inboxes can be a bit finicky and switching my sending times might end up getting StreetSmarts put into your junk or Promotions folder. To stop this from happening I’d really appreciate it if you could add StreetSmarts to your contacts (here’s a link to how to do that in 3 seconds) or even literally just replying to this in a blank email will generally let the algorithm know we’re friends.

I am really excited about this next chapter and to produce even more unique and informative financial content. I hope you will continue on this journey with me!

Sincerely,

Ryan Metcalf aka MarketLab

Street Stories

The 60/40 Portfolio

As a pure equities guy, the thought of diluting my precious portfolio with bonds (yuck!) is something I find abhorrent. However, many folks in the wealth management game disagree with me and that’s why they end up sticking their clients in a mixed portfolio of stocks and bonds.

Often times this comes in the form of a ‘60/40’ portfolio; 60% stocks and 40% bonds. Disgusting, really.

For those unfamiliar, the idea is that stocks and bonds have a low-ish correlation. Often times when stocks do poorly, bonds do ok and thus they add some nice diversification. Portfolios structured this way are increasingly more common as the individuals age, as preserving wealth is more important than absolute returns. I know, lame right?

Anywhoo, the bad news is that bonds typically underperform equities by a country mile so that extra bit of portfolio insurance can end up being quite pricey over the long-term.

For example, as you can see above, stocks are awesome; bonds are lame; and a mix of stocks and bonds is… fine, I guess.

Anyway, I thought it would be interesting to see how often the 60/40 actually outperforms the pure stock portfolio. To do this, I graphed the 1 year rolling total return for the stock portfolio (literally just the S&P 500 with dividends reinvested at the ex-div date) vs. the 60/40 portfolio (S&P and Bloomberg’s main US bond index). The red shaded areas indicate times when the 60/40 portfolio returned more than the pure stock portfolio.

And I won’t lie, I didn’t think the 60/40 would outperform more than a quarter of the time. Huh.

Yeah but that was over a short investment period. The longer we go out, the greater the likelihood of stocks outperforming. Right? Right?!

WRONG! The 5-year return comparison sees the 60/40 outperforming 35% of the time.

(The caveat here is that this time period happens to include some pretty turbulent markets)

So is that it? The 60/40 is actually useful?

Well, there are some things we should be clear about first. In this example, the 60/40 did end up outperforming the pure stock portfolio a decent chunk of the time but that outperformance wasn’t exactly amazing.

Let me give you a ‘fer instance’: Over the period from 1998 to present, the pure stock portfolio had a 5 year return that was on average 10.8% higher than the 60/40. Sure, 35% of the time the 60/40 did better but it was only by a modest amount.

You sacrifice a LOT most of the time in order to save a LITTLE some of the time.

Obviously I’m being a bit dramatic here, and that incorporating bonds into your portfolio is a valuable tool for diversification - particularly for folks nearing retirement age.

And while I’m a firm believer in stocks over bonds, if you’re the type of person just punting meme stocks or momentum trading, then you definitely should consider adding bonds to your portfolio.

Retail Investors Underperform

Shocker, I know.

Anyway, I found out that Robinhood has this thing called their ‘Investor Index’ which essentially tracks a basket of their users’ 100 top holdings, weighted by what they call ‘Conviction¹’.

As you can see, Robinhood investors crushed it during the go-go Covid years but have faired rather poorly more recently.

1. I’m pretty sure this is just a basic weighted average adjusted for off index companies and they just wanna sound fancy.

For some context, the Robinhood Investor Index is up ~50% since the start of 2020. Meanwhile the Nasdaq is +105% and the S&P 500 is 81%. And just to be cheeky, the 60/40 portfolio above is +57%. 🙃

This got me wondering how much of that underperformance has to do with brain damage.

Hear me out: The rise of Robinhood attracted a lot of first time investors, which coincided nicely with the ‘Everything Bubble’ during Covid. Investing seemed easy, and stocks only went up. Hell, the Barstool Sports guy even thought he was the next Warren Buffett

That worked great until the market crashed in 2022. For those riding the meme stock wave up and back down, the trauma has doubtless led some to entrench themselves into their investment theses. For example, below you can see the large allocation of meme stocks within the top 50.

I mean, hell, in a world where Robinhood literally trades +5k securities, there are four EV stocks in the top 25? Ooooof.

Joke Of The Day

Interviewer: What are your thoughts about nepotism in a workplace environment?
Candidate: Well, that’s a really good question, Dad

Hot Headlines

CNBC / Netflix beats quarter on top and bottom lines driven by advertising growth. The company added +5.1m subs to take global total to 282.7 million.

Reuters / US weekly jobless claims unexpectedly fall. Initial claims for state unemployment benefits dropped 19k to a seasonally adjusted 241k for the week ended Oct. 12 - well below the 260k Wall Street was expecting.

Nasdaq / The Energy Information Administration on Thursday showed crude oil inventories fell by 2.2 million barrels last week after jumping by 5.8 million barrels in the previous week. Economists had expected crude oil inventories to rise by 2.3 million barrels.

Reuters / Average homeowner premiums in Florida surged nearly 60% between 2019 and 2023. Some major insurance providers have reduced coverage.

Reuters / U.S. regional banks' profits outdid Wall Street expectations in the third quarter as their investment banking fees surged from a revival in dealmaking and helped offset higher deposit costs.

CNBC / Nearly 2 in 5 cardholders have maxed out a credit card or come close, report finds. Another sign just how awesome the US consumer is doing.

Bloomberg / Traders see 20% chance of half-point ECB rate cut in December.

Trivia

This week’s trivia is on Walmart.

1. When was Walmart founded?

   A) 1945

   B) 1950

   C) 1962

   D) 1970

2. Where was the first Walmart store opened?

   A) Dallas, Texas

   B) Rogers, Arkansas

   C) Wellington, Kentucky

   D) Woodstock, West Virginia

3. What was the original name of Walmart?

   A) Walton's 5&10

   B) Walton's Market

   C) Walton's Discount City

   D) Sam's Wholesale Club

4. How many Walmart stores are there worldwide as of 2023?

   A) About 5,000

   B) About 8,000

   C) About 10,000

   D) About 11,000

(answers at bottom)

Market Movers

Winners!

• Webster Financial (WBS) [+11.6%]: Q3 earnings matched expectations with revenue falling short, but net interest income (NII) and net interest margin (NIM) came in strong, with deposits and loans showing solid growth.

• Snap-On (SNA) [+10.0%]: Q3 earnings beat expectations while revenue held steady, as international tool sales shined despite weaker performance in the Commercial/Industrial segment.

• Taiwan Semiconductor (TSM) [+9.8%]: Strong profitability on better margins and cost control, with Q4 sales guidance far exceeding expectations, boosted by growing AI demand.

• Travelers Cos. (TRV) [+9.0%]: Big Q3 earnings beat, helped by better combined ratios and net interest income, despite higher catastrophe losses.

• Blackstone (BX) [+6.3%]: Q3 earnings and revenue topped estimates with $41 billion of inflows, as the company hinted at plans to take some investments public soon.

• Zuora, Inc. (ZUO) [+5.7%]: Silver Lake and GIC are set to acquire Zuora for $10 per share in cash, with the deal expected to close in early 2025.

• Synovus Financial (SNV) [+5.1%]: Q3 adjusted earnings came in strong with higher NII and fee income, though loan growth guidance was trimmed due to paydowns in real estate and senior housing.

• Expedia Group (EXPE) [+4.8%]: Reports suggest Uber is exploring a possible acquisition, but discussions are still at an early stage with nothing formal yet.

Losers!

• Elevance Health (ELV) [-10.6%]: Q3 EPS missed expectations by 13%, driven by a worse-than-expected medical loss ratio (MLR), prompting lowered FY24 and FY25 guidance due to struggles in the Medicaid business.

• ManpowerGroup (MAN) [-9.8%]: Q3 results met expectations but Q4 guidance disappointed, with cautious employer demand persisting in North America and Europe.

• Liberty Energy (LBRT) [-8.9%]: Q3 adjusted EBITDA fell short, with reduced frac activity expected in Q4, though healthy free cash flow (FCF) is forecast for 2025.

• CSX Corp (CSX) [-6.7%]: Q3 results missed across the board, with lower Q4 revenue expected due to weaker fuel prices and coal demand, plus disclosure of an SEC subpoena over an accounting restatement.

• Equifax (EFX) [-3.3%]: Q3 was solid, but weak Q4 guidance, especially in international and employer services, overshadowed otherwise positive commentary on credit inflections.

• Huntington Bancshares (HBAN) [-2.6%]: Q3 earnings beat, with strong deposit growth and low expenses, though analysts were concerned about softer Q4 guidance.

• KeyCorp (KEY) [-2.5%]: Q3 beat estimates with lower provisions and solid deposit growth, but mixed Q4 guidance left analysts divided on future performance.

Market Update

Trivia Answers

1. C) Walmart was founded in 1962.

2. B) The first Walmart opened in Rogers, Arkansas.

3. C) Walton's Discount City was the original name of Walmart.

4. D) There are currently about 11,000 Walmart stores.

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