How to use the ‘stock-to-bond-ratio’ to invest

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Updated on Apr 2, 2020

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According to Steve Cassaday, CFP, president of Cassaday & Company, Inc., given what most people have saved by retirement, and the average lifespan today, a more aggressive portfolio is the only choice if people are going to maintain their lifestyles.
The “stock-bond ratio” strategy is derived from the S&P 500 divided by the U.S. Long-Term Treasury Bond Index. It is used to predict an eventual economic recovery and to provide some selections.
Will Geisdorf, an ETF strategist, said that barring an escalation in the trade war, we should see a recovery in early 2020 based on historical lead times.

Investors are now thinking about bond investment in a whole new way, thanks to the changing market dynamics. Savvy investors have moved away from the old age adage that required one to hold a bond portfolio equal to their age (at the age of 30, you should be 30% in bonds; age 40, 40%; and so on).

Steve Cassaday, CFP, president of Cassaday & Company, Inc., an investment management and financial planning firm in McLean, Virginia says: “The real risk to most people’s portfolios is, paradoxically, not taking enough market risk with higher-returning but more volatile investments, like stocks, bonds and commodities.

“Given what most people have saved by retirement, and the average lifespan today, a more aggressive portfolio is the only choice if people are going to maintain their lifestyles.”

So then what is the best way to invest if the global downturn bottoms and the economy begins to grow in 2020?

Ned Davis Research answered the question using familiar concepts but with a bit of a twist. Will Geisdorf, the firm’s lead ETF strategist, uses a technique called the “stock-bond ratio”. The strategy is derived from the S&P 500 divided by the U.S. Long-Term Treasury Bond Index, to predict an eventual economic recovery and to provide some selections.

“The stock/bond ratio has bottomed before the economy in each of the last seven global slowdowns. Barring an escalation in the trade war, we should see a recovery in early 2020 based on historical lead times,” read a recent analysis by Geisdorf.

The analysis of Exchange-Traded Funds (ETFs) by Geisdorf indicating how ETFs can thrive in such an environment returns a set of funds that are highly volatile, risky, and high in beta compared to the market at large.

Other sectors represented by these ETFs that are also likely to thrive during reflationary periods include health care, banks, and biotech.

Geisdorf’s report also backs past fundamental researches that suggest investing in several of similar sectors. He concluded saying, Biotech, health care services, energy, and banks all have the best “valuation risk/reward”.