In the fixed-income markets, short-duration securities outperformed longer-duration issues as interest rates rose in the wake of strong economic data. High-yield bonds also strengthened—faring better than the previous week, when rising rates prompted investors to aggressively shift assets from lower-quality bonds to higher-quality issues that were perceived as safer investments. Emerging markets debt performance was lackluster, however, as the Mexican peso and Russian ruble depreciated. However, strong results from the Turkish lira and the Argentine peso were positives for the week.
GAIN: Active Asset Allocation
Equity markets rebounded last week, with emerging markets leading the way (and foreign stocks outperforming domestic equities generally). We increased exposure to emerging markets, U.S. small-company stocks and U.S. large-cap value stocks in the equity portfolios. We also reduced exposure to factor-based investments.
Most of the bad news regarding the Chinese economy is already priced into the market, and signs of progress or improvements should likely fuel rallies like the one seen last week. In the meantime, the Chinese government is taking steps to stimulate the economy. When these factors are taken into account, along with significant underperformance from emerging markets earlier this year, there could be the potential for a rebound in emerging markets.
The broad-based bond market lost ground last week and is now down almost 1% for the quarter and 2.6% year-to-date. The stock market rebound helped boost corporate credits—high-yield bonds, in particular.
PROTECT: Risk Assist
Global equities rose last week following a sizable downturn, but stock market volatility expectations (as measured by the VIX) remain stubbornly high, at around 21. That said, there are no meaningful signs that the equity risk seen during October has bled into other asset classes such as corporate bonds or foreign currencies.
The Risk Assist portfolios made trades that were in line with trades made in the Gain portfolios. For example, we increased emerging markets and U.S. small-company stock exposure while reducing exposure to European markets and U.S. factor-based investments.
SPEND: Real Spend
Global stocks staged a strong rebound last week (up over 3%) while broad-based bonds slumped (down 0.60%). Despite struggling in February, March and October of this year, global stocks are still outpacing bonds year-to-date (-2.4% versus -2.6%, respectively). Of course, U.S. stocks—up 3.2% so far this year—have significantly outperformed both of those asset classes.
Over the past 12 months, global stocks have outpaced broad-based bonds by more than 3 percentage points—while the return spread between U.S. equities and bonds is nearly 10 percentage points.
In the fixed-income yield space, convertible bonds fared the best last week (up more than 3%) while long-duration bonds fared the worst (down -2.4%). In the equity yield space, domestic dividend-paying equities gained more than 3.5% while international REITS posted the worst performance (up 0.4%).