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As we near the end of 2018, it has proven to be a historically challenging year for balanced portfolios as both stocks and bonds have struggled. The chart above shows the annual return of the S&P 500 and 10-year treasury bonds since 1928. Over this time period, stocks and treasuries have both posted negative returns for a calendar year only three times. If the year ended today, 2018 would be the fourth such year. This occurrence is so rare because stocks and bonds historically have a very low correlation. When stocks sell off, it is not uncommon to see investors shift investment dollars from stocks to bonds in the hopes of safer, less volatile returns, which then drives bond prices higher. However, that has not been the case so far this year. Part of what has held off the move to bonds has been the raising of short-term interest rates by the Federal Reserve, which makes existing issues less attractive. Also, because of the recent increase to the federal deficit there has been a heavy surge in treasury issuance which has kept pressure on treasury prices. As we move forward into 2019, we will be paying attention to see if the return relationship between stocks and bonds returns to its typical behavior.
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