In my experience, when one asset class begins to enjoy increased popularity at the expense of others, it’s time to take some chips off the table. That is the case with equities; after a rapturous July that saw stock indexes hit multiyear highs, irrational exuberance is beginning to creep into the markets. Diversifying investments, particularly into fixed income, should not be ignored.
To be sure, there are all sorts of reasons why bonds’ luster has dimmed compared to stocks. Rising short-term interest rates, a much-better-than-expected earnings season, and the putrid performance of the fixed-income sector in July are but three reasons to loathe them. However, I think there are some compelling reasons to maintain a modest portion of bonds in a diversified portfolio as the summer comes to a close.
First off, bonds are a great hedge against rising oil prices. This may sound counterintuitive, but investors should consider every rally in crude prices as leading eventually to reduced economic activity. Fixed income would be an obvious beneficiary to any slowdown, since the Fed would likely be forced to stop raising rates.