Rebalancing Portfolios as Risk Premiums Drop

This podcast episode, "Thoughts on the Market," hosted by Serena Tang, Morgan Stanley's Chief Cross Asset Strategist, discusses the relevance of the 60-40 portfolio in the current market and future long-term market returns. The episode highlights that while global equities and U.S. high-grade fixed income have seen significant rallies, expected long-run returns for equities are projected to be lower, while fixed income offers relatively elevated returns due to higher yields. The equity risk premium has compressed, indicating investors are not being compensated as much for taking on risk, largely due to rich valuations, particularly in the U.S. The efficient frontier has shifted, suggesting that increased portfolio risk may not yield proportionally higher returns. The 60-40 portfolio is expected to deliver lower annual returns than historically, and the optimal mix of stocks and bonds is evolving, potentially requiring investors to increase equity allocation if AI leads to greater synchronization between stocks and bonds.