# Monthly 60/40 Equilibrium
Source: https://www.yieldcurve.pro/blog/60-40-equilibrium-001  
Published: 2023-12-16  
Tags: 60/40, Bonds, ETFs, SPY, Stocks, TLT

_What do current market movements in stocks and bonds have to say about 60/40 fund weights?_

# What do current market movements in stocks and bonds have to say about 60/40 fund weights?

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As the name implies, these are funds that are comprised of 60% stocks and 40%
bonds.  They are intended to provide reliable risk-adjusted return streams via
diversification of stocks and bonds.  The way it works is that the initial
relative values (or weights) of stocks and bonds are set at 60% and 40%,
respectively.  Periodically, if stocks have returned more than bonds, stocks
are sold in order to restore equilibrium and vice-versa.

It is interesting to look at the historical drift in equilibrium weights on a
period-by-period basis.  Consider the following experiment:  track the
cumulative return of a given stock and bond index (say SPY and TLT) every
month.  Next, combine that data to estimate a one standard deviation envelope
of weights (for stocks and bonds) as a function of the days in any given month.
Then estimate, for the current point-in-time, how out of equilibrium the 60-40
weights are as a normalized distance from average (or z-score).  This allows us
to estimate how much (in weight space) a typical 60-40 fund needs to move in
order to restore equilibrium.

The chart in Figure 1 captures all of this information.

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<img src="/admin/blog/image/57/blog_60_40_equilibrium_001.png">
#### **Figure 1**: Stock/Bond Weights For December 2023

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It shows that historically, stocks (SPY) have drifted higher than bonds (TLT)
by about 10 basis points on average (the solid gray lines) on a monthly basis.
The chart also shows that a one standard deviation move in weights amounts to
about a 150 basis point change in either direction.  Last, we can say the
following about the most recent month (represented by the blue and orange
lines):

- stocks and bonds have both experienced strong positive performance this
month
- stocks and bonds have both experienced strong positive performance this
month
- bonds have outperformed stocks
- exposure to stocks needs to increase by approximately 125 basis points in
order to restore equilibrium amounting to more than a  1.0 imbalance in
standard deviation (z-score) space
- naively this implies that 60-40 funds would be buyers of stocks and sellers
of bonds at month end