In December, as U.S. equities were roiled by volatility, bonds did the obvious and became the typical default safe-haven. According to the latest report from State Street Global Advisors, fixed-income exchange-traded funds (ETFs) took in $16.2 billion during a tumultuous December that saw the Dow Jones Industrial Average fall 8.7 percent and the S&P 500 lose 9 percent, making it the worst December since 1931.
However, the case for bonds can be made whether the markets are bearish or bullish for the rest of 2019.
The Bear Market Case
On Tuesday, the Dow Jones Industrial Average fell over 400 points in what’s been a familiar sell-off investors have been accustomed to the past few months. This could spur even more capital allocations into bond funds in the coming months.
Steve Azoury, owner of Azoury Financial in Troy, Michigan, recommends using bond laddering for investors purchasing the actual bonds themselves.
“Bonds are often a source of solace during stock downturns and active bond funds have done relatively well,” said Steve Azoury, owner of Azoury Financial in Troy, Michigan. “One strategy would be creating a ladder of bonds with sequential maturities. Having money come due on a regular basis eliminates the need to have a lot of money sitting in cash.”
For the ETF investor, this could be a case of diversifying an ETF portfolio that includes short- and long-term fund strategies. In addition, investors can opt for actively-managed funds that allow more flexibility for fund managers to invest according to the current market landscape for bonds.
The Bull Market Case
Despite the current stock market doldrums, Azoury feels that there is still room to run for the bull market that allowed companies like Amazon and Apple to cross the $1 trillion valuation mark in 2018.
“I don’t believe the bull market is over,” Azoury added. “The fundamentals are too good: low unemployment, solid interest and high confidence of the public. While leading a bumpy road, the stock market can still sustain growth for 2019.”
However, with an extended bull market comes the risk of higher interest rates that could tamp down bond income. Even with a more dovish Federal Reserve that instituted four rate hikes in 2018, there’s no certainty that less rate hikes or even a rate cut is in store for 2019.
“Perhaps a 100 percent allocation in growth stocks is just not the best strategy any longer,” said Angelo DeCandia, professor of business at Touro College. “But great care should be taken when moving out of stock and into bonds, primarily for the interest-rate risk which bonds may suffer in 2019.”
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