The overall weakness in equities during the current quarter has been particularly significant among the more overvalued stocks and sectors. If the markets stage a broad recovery through the end of the year, it could suggest a positive environment for stocks in 2019.
The portfolios’ exposure to emerging markets may be beneficial, given the positive talks between Trump and Xi. Most of the bad news was already priced into emerging markets, making surprises to the upside beneficial to this asset class. We will be monitoring portfolio breadth and the spread among sectors, factors and styles this week.
Bonds were mostly flat for the week, even as investors interpreted the Fed’s comments as more dovish than expected—which kept the yield on the 10-year U.S. Treasury note closer to 3% than we would prefer. Corporate credits improved along with stock prices. Although high-yield bonds have been volatile in recent months, spreads have not widened to the extent they did back in 2015 and 2016. We will be monitoring the markets to see if yields remain stable as stocks firm up.
PROTECT: Risk Assist
There was no activity in the Risk Assist portfolios following a strong week for global equity markets. This week, however, we will update our volatility forecasts. If those forecasts call for lower volatility, the risk of being whipsawed will decline. Thus, we continue to monitor the portfolios for potential de-risking activities.
SPEND: Real Spend
Equity markets posted strong gains last week, with global stocks outpacing investment-grade U.S. bonds by 3.3% and domestic stocks outperforming bonds by 4.5%. Last week’s performance brings the one-year spread between global stocks and investment-grade bonds to 1%—and to 7.7% for U.S stocks versus investment-grade bonds.
That said, dovish comments from the Fed last week (which helped boost stock prices) should also help to support bonds, as investors are now anticipating just one interest rate hike by the Fed in 2019—down from as many as three just a few months ago. Fewer rate hikes should alleviate some of the pressure on bonds—especially longer-duration securities such as long-term Treasuries and corporate bonds, whose prices are hurt particularly bad by rising rates.
Exposure to domestic-focused growth allocations performed well for the week. But our preferred stock exposure continued to struggle.