Fixed-income markets were mostly flat, with investors taking a wait-and-see approach going into this week, when the Fed will decide whether to raise a key short-term interest rate. The market’s reaction to the decision could go either way depending on the statement the Fed makes in the wake of its decision. For example, stocks could potentially benefit if the Fed holds steady while nonetheless expressing confidence in the domestic economy.

Meanwhile, the lack of buyers seen in the equity markets is also showing up in the corporate fixed-income space. The move lower on U.S. interest rates lately has been driven in part by institutions unwinding short Treasury trades they have had in place for some time. Rates could rebound a bit once that selling pressure diminishes (and if stocks stabilize).

PROTECT: Risk Assist

Despite a choppy week for equities, we made no changes to our Risk Assist models. The volatility forecasting we do regularly has enabled us to avoid getting whipsawed—that is, buying at high points and selling at low points—in the current volatile environment.

SPEND: Real Spend

Global equities fell while investment-grade bonds rose last week. As a result, the return spread between the two asset classes narrowed once again. The one-year spread now stands at -4%—the result of global stocks being down -5% and investment-grade bonds being down just -1% during that time period. That said, U.S. equities are still in positive territory during the past 12 months—up approximately 1%.

Inflation data was released last week, with headline CPI inflation for November coming in at 2.2%—in line with estimates, and down -0.3 percentage points from October. Core inflation was also 2.2%. Market expectations of inflation continue to drift lower, with longer-term estimates at 2.2% as well.

It appears that 2018 will be a year in which equities, broad-based bonds and even commodities will struggle to post positive returns. For example, year to date:

  • Commodities are down -7%
  • Investment-grade bonds are down -1%
  • Global stocks are down -6.6%

On the plus side, REITs are up 2% for the year thus far, growth stocks are up 3.5% (despite their considerable volatility) and low-volatility stocks are up over 2%. One of the top-performing broad asset classes: Direct investment in the U.S. dollar, up +8%.

This year is a reminder that, sometimes, diversification does not work as it normally does—a fact that reinforces the importance of having goals-based planning and a retirement income solution in place.

Horizon Investments is a participant in the ETF Strategist Channel.


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