‘Cash is a trap,’ warns JPMorgan’s David Kelly. Here’s how a traditional mix of stocks and bonds may pay off.

A traditional portfolio comprising 60% stocks and 40% bonds may provide an annual return of 7% over the next 10–15 years, JPMorgan estimated in its 2024 Long-Term Capital Market Assumptions report. Cash has meanwhile attracted investors, with ultra-short-term Treasury bills currently yielding more than 5%, amid bond losses this year and a recent slump in stocks. 

“We understand that cash is a comfortable place to be,” Monica Issar, global head of multi-asset and portfolio solutions at J.P. Morgan Global Wealth Management, said during the media briefing. “But cash doesn’t rally.”

U.S. stocks remain up this year after suffering losses during the third quarter as the equities market was rattled by a rapid climb in Treasury yields. The S&P 500 index has risen around 13% so far in 2023 as of Wednesday morning, after slumping in August and September. 

The spike in yields has hurt equities while pummeling long-term bonds, with the iShares 20+ Year Treasury Bond ETF
TLT
posting a 12.2% loss on a total return basis this year through Tuesday, according to FactSet data. 

Ten-year Treasury rates
BX:TMUBMUSD10Y
climbed on Tuesday to 4.846%, their highest level since July 2007 based on 3 p.m. Eastern Time levels, while the yield on 30-year Treasurys
BX:TMUBMUSD30Y
rose to 4.951% in its highest rate since August 2007, according to Dow Jones Market Data. 

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Cash-like T-bills have fared relatively well, with the iShares 0-3 Month Treasury Bond ETF
SGOV
seeing a total return of around 4% this year through Tuesday as the underlying assets provide high yields in the wake of the Fed’s aggressive rate-hiking cycle begun in early 2022. 

For example, three-month T-bills
BX:TMUBMUSD03M
were yielding 5.5% in Wednesday morning trading in New York, FactSet data show.

‘Owning the stuff you hate’

Kelly said that diversifying assets under a long-term strategy sometimes means “owning the stuff you hate.” 

As for equities, “even if U.S. margins prove resilient, returns available in other developed markets remain attractive by comparison,” according to the JPMorgan report. “The market dominance that U.S. firms enjoyed through the 2010s faces competition from Europe and Japan in particular.” 

The outlook for emerging-market stocks has “moderated,” though, with investors “increasingly skeptical about the outlook for China and unwilling to pay high multiples,” JPMorgan said.

Shares of the iShares MSCI ACWI ex U.S. ETF
ACWX,
which tracks an index of international stocks in developed and emerging markets while excluding the U.S., have risen 3.5% this year through Tuesday after falling 18.2% last year, according to FactSet data. 

In the U.S., the S&P 500 is recovering in 2023 from a 19.4% drop last year that marked its worst annual performance since the global financial crisis of 2008. While the index is up so far this year, it has slumped more than 2% over the past month, FactSet data show, at last check.

Both “stocks and bonds sold off in just three of the past 50 years: 1969, when inflation doubled in two years; 1974, when inflation reached a record 12% around the energy crisis; and 2022, when the longest continuous period of disinflation (1982–2022) in modern history came to an end,” the report said. 

According to J.P. Morgan Asset Management, the 60/40 portfolio is “still a great starting point from which to extend out of cash and into a wide opportunity set.” 

The U.S. stock market was trading lower on Wednesday morning as investors digested third-quarter earnings results, including from Morgan Stanley
MS,
-6.78%,
and long-term Treasury yields edged higher. The Dow Jones Industrial Average
DJIA
was down 0.5%, while the S&P 500
SPX
fell 0.7% and the Nasdaq Composite
COMP
dropped 0.9%, according to FactSet data, at last check.