Bonds Reclaim Defensive Status Amid Stock Volatility

Victoria Reuvers

The stock market operated like the world’s greatest casino last week. We observed the third largest spike in the history of the Volatility Index, trailing only 2008 and 2020, coinciding with the most significant stock market drawdown of the year.

However, even during periods of distress, some asset classes perform well, highlighting the critical importance of remaining diversified.

Enter bonds: an asset class that faced many questions due to its inability to provide defense during the bear market in 2022. Stocks and bonds both finished down by more than double digits that year, marking the first time in history.

But time heals all wounds. The increase in yields since that period has greatly benefitted bond investors, and the results are starting to show.

Since the S&P 500 peaked on July 17, it experienced a peak-to-trough drawdown of 8.5% through August 5. Meanwhile, bonds were positive during this period, gaining over 2%.

Examining the most the volatile days during this period offers even greater insight. The S&P 500 experienced three separate trading days with declines of 2% or more. On each of those days, bonds significantly outperformed stocks.

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