60/40 Blend May Rebound This Year: Wells Fargo

What You Need to Know

Stocks and bonds are likely to return to their negative correlation this year, the firm says.
The market may see near-term volatility, but Wells Fargo predicts that stocks will rebound in 2023.
Commodities and other alternative investments can help a portfolio get through rough times.

The 60% stock/40% bond portfolio may be primed for a healthy rebound in 2023 after taking a drubbing in last year’s market, according to Wells Fargo, which anticipates a solid recovery for the S&P 500 Index.

The Wells Fargo Investment Institute‘s 2023 forecasts for stocks and bonds “suggest that the 60/40 blend may potentially rebound from its double-digit loss of this past year,” the organization said in a note published Tuesday.

“Although we expect that stocks and bonds are likely to exhibit some near-term volatility, the midpoint of our year-end price target for the S&P 500 index this year is 4,400, or nearly 15% higher than its current level as of this writing, and that does not include dividends,” the firm wrote.

As far as the bond market, WFII believes long-term interest rates are approaching peak yields in this cycle. The firm recently upgraded its guidance on duration and long-term U.S. taxable fixed income to favorable and most favorable, respectively, and noted that 2022 marked the second consecutive down year for the bond market, which hadn’t happened in more than 60 years.

“U.S. bonds historically have never posted three consecutive years of negative returns,” WFII said.

Stocks and bonds this year should return to the negative correlation — moving in opposite directions — they experienced from 2000 until 2022, when the correlation turned positive, according to Wells Fargo. Rapidly declining inflation, combined with a peak in long-term rates, suggest bonds may provide beneficial portfolio diversification in 2023, the firm said.