Commodities Can Be Swapped for Bonds in 60/40 Funds, Bofa Strategists Suggest

Investors who traditionally follow the well-known 60/40 portfolio strategy might want to consider replacing bonds with commodities, according to strategists at Bank of America Corp. Typically, the 60/40 strategy involves allocating 60% of a portfolio to stocks and 40% to fixed income. However, in today’s environment of persistently high inflation, commodities could prove to be a more advantageous option, as noted by the Bank of America strategy team, including Jared Woodard and Michael Hartnett, in a recent report.

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“The commodity bull market is just beginning,” the strategists highlighted, suggesting that this asset class could be a stronger choice for the 40% allocation traditionally reserved for bonds in the 2020s.

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Commodity prices have faced challenges in bouncing back after reaching their peak in 2022, with concerns about a global recession and sluggish economic growth in China contributing to their underperformance. Despite these headwinds, the Bank of America strategists pointed out that the annualized returns for commodities since the start of the decade have remained solid, ranging from 10% to 14%. In contrast, U.S. Treasuries with a 30-year maturity have delivered significant losses to investors, with nearly 40% declines over the past four years.

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The strategists argue that a secular bull market for commodities in the 2020s is only just beginning. They attribute this to a variety of factors that they believe will continue to drive inflation, including rising debt levels, growing fiscal deficits, changing demographics, the trend of reverse-globalization, advancements in artificial intelligence, and policies aimed at achieving net-zero carbon emissions.

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While global stocks and bonds have performed well in 2024, with a combined rally of about 16% and on track for a second consecutive year of gains, the Bank of America strategists acknowledge that bonds still serve as the best hedge against a potential hard-landing scenario for the U.S. economy. However, they believe that commodities may offer a more resilient alternative in the face of ongoing inflationary pressures.

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The case for commodities over bonds hinges on the expectation that inflation will remain elevated for the foreseeable future. High inflation erodes the purchasing power of fixed-income investments like bonds, making them less attractive in comparison to commodities, which tend to perform well in inflationary environments. Commodities, including energy, metals, and agricultural products, often see their prices rise when inflation is high, providing a natural hedge against the declining value of money.

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Moreover, the strategists highlight that the factors driving inflation today are structural rather than temporary. For instance, rising debt levels and fiscal deficits mean that governments may continue to spend more than they take in, fueling inflation. Demographic changes, such as aging populations in developed countries, are likely to put additional pressure on government budgets and contribute to inflationary trends. The move toward reverse-globalization, where countries prioritize domestic production and reduce reliance on global supply chains, can also lead to higher costs and inflation.

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Additionally, the rapid advancement of artificial intelligence (AI) is expected to disrupt industries and economies, potentially leading to both productivity gains and inflationary pressures as new technologies are integrated into the workforce. Meanwhile, policies aimed at achieving net-zero carbon emissions are likely to drive up the cost of energy and commodities, as the transition to cleaner energy sources requires significant investment in infrastructure and technology.

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Given these dynamics, the Bank of America strategists suggest that investors should consider adjusting their portfolios to account for the potential benefits of commodities in this new economic environment. While bonds have traditionally provided stability and income in a 60/40 portfolio, the current and anticipated economic conditions may warrant a shift towards commodities, which could offer better returns and protection against inflation.

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In summary, the Bank of America strategists propose that in the 2020s, commodities might be a more effective component of a diversified portfolio than bonds, particularly in an era of sustained high inflation. While bonds remain a crucial tool for hedging against economic downturns, the long-term outlook for inflation and structural economic changes suggests that commodities could play a more prominent role in achieving portfolio growth and stability in the years ahead.

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