60/40 in an era of American Unexceptionalism

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model that applies trend-following principles based on the inputs of global stock and commodity prices. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can be found here.

  

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

 

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities (Last changed from “sell” on 28-Jul-2023)*
• Trend Model signal: Bearish (Last changed from “neutral” on 11-Apr-2025)*
• Trading model: Bullish (Last changed from “neutral” on 28-Feb-2025)*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends. I am also on X/Twitter at @humblestudent and on BlueSky at @humblestudent.bsky.social. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real time here.

Threats to the 60/40 Portfolio

The conventional asset mix of 60% equities and 40% bond is designed to maximize return and minimize volatility risk under a reasonable set of risk tolerance assumptions. The equity portion of the portfolio is meant to provide growth, while the bond portion is designed to provide portfolio stability as bond prices have low to negative correlation to stock prices. In addition, bonds have the additional benefit of a steady income and high assurance of capital preservation, or getting your money back.
 

What happens if the “getting your money back” assumption is shaken?
 

Investors saw that recently when Treasury yields rose (and Treasury prices fell) and the USD fell at the same time. The episode was interpreted as a possible end to the era of American Exceptionalism and the USD as a safe-haven asset. While we saw a similar episode in early 2018, it nevertheless underscores concerns about the 60/40 portfolio as stock bond correlations were rising in both instances. Rising correlation leads to greater portfolio volatility and a reduction in the diversification effects of the two asset classes, which can be worrisome during the current climate of elevated market stress.

What can investors do under such circumstances?
 

The full post can be found here.

 

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