What a Rally Reveals About Real Diversification

Good morning,

If you glanced at the headlines this week, you saw plenty of green. The S&P 500 climbed 4.7 %, the Nasdaq 6.7 %, and even the venerable Dow added 2.6 %—its best five-day stretch in months. Chip-maker earnings impressed, inflation cooled a touch, and the ever-hopeful “Fed-will-cut” narrative came roaring back. Meanwhile, the 10-year Treasury yield slid to 4.28 %, gold lost some of its defensive shine, and crude oil fell more than 12 % after Middle-East shipping lanes stayed blessedly open.

If you’re enjoying a quiet cup of coffee, remember this: since 1926, a ±2 % week for the S&P has happened about one-third of the time. Big weeks feel exciting, but they are not unusual. They are simply part of the market’s natural breathing pattern—an exhale after a string of inhales. As Wells Fargo Investment Institute reminded us on Friday, “Investors should remain disciplined long-term investors…not allowing the week’s headlines to rewrite sound strategy”.

That thought leads to the bigger question many readers asked in our inbox this week.

Is the Classic 60/40 Still Doing Its Job? 

When both stocks and bonds finish higher in the same week—as they just did—some investors wonder whether diversification is losing its edge. After all, the three-year stock-bond correlation has drifted up to roughly +0.6, the highest since the early 2000s [5]. If the two move together more often, what’s the point of owning both?

Perspective helps. Over the past quarter-century, a plain 60/40 mix still compounded at roughly 6 % a year—despite a tech wreck, a global-financial crisis, a pandemic, and 2022’s “everything sell-off.” It did so because each side of the portfolio responded differently at different times, and because the simple act of rebalancing forced investors to buy what was cheap and trim what was dear.

Today’s elevated correlation is a weather report, not a climate change. Bond yields that were pushing 5 % only a month ago have eased, which actually improves the future income those bonds can deliver. And when equities eventually stumble—and they always do—correlations tend to snap closer to zero, reviving the bond shield many retirees count on. The more durable question, then, isn’t “Does diversification still work?” but “Am I still disciplined enough to let it?”

A Voice from Prescott, Arizona 

David R., age 68, wrestled with that very question. A Forest Service retiree, David has owned a “plain vanilla” 60/40 portfolio since he hung up his ranger hat seven years ago. In 2022, when both sides of the ledger seemed to bleed at once, friends urged him to park everything in cash “until things looked clearer.”

“I almost did,” he admits, “until I remembered 2008.” Back then David bailed out at the bottom and spent two anxious years clawing his way back. This time he stayed put, rebalanced once, and kept drawing the same monthly “paycheck” from his portfolio. Watching equities soar this week and oil prices tumble last week only reinforced the lesson he paid for years ago: “Markets hand out plenty of excitement, but they reserve the real rewards for people who refuse to trade their long-term plan for short-term comfort.”

David’s experience is not an argument for sitting still no matter what; it’s a reminder that a rules-based plan—one you can live with emotionally—beats ad-hoc decisions forged in the heat of headlines. When the market serves up a burst of optimism, enjoy it. Just don’t let it rewrite the principles that got you here.

Before You Go… 

Our mission each weekend is simple: deliver perspective and a measure of calm. If today’s reflection struck a chord—or raised a question—let us know. There’s a one-click poll below asking whether you still believe the classic 60/40 mix is right for you. Your anonymous vote helps us tailor future letters to the community’s real concerns.

Until next weekend, keep savoring the small moments, keep trusting the plan you built thoughtfully, and remember: the market’s noise is constant, but wisdom comes in pauses like this one.

Warmly, 

The Wealth Money Catalyst Team