Despite the negative news, the market sold off in a mostly orderly manner—without signs of tremendous stress or panic selling.
Bonds were flat, with Treasuries holding up better than corporate credits as investors favored the relative safety of government-back fixed-income securities. At this time, we continue to prefer a shorter overall duration and higher yield profile in the portfolios, but we will continue to monitor.
PROTECT: Risk Assist
Volatility as measured by the CBOE Volatility Index (VIX) rose significantly during the week as markets sold off due to fears of a potential trade war between the U.S. and China. The VIX ended the week at around 24—higher than its long-term average.
Risk Assist uses volatility forecasting to help guide de-risking and re-risking decisions, with the goal of helping portfolios avoid the worst of the “whipsaw” effects that could have occurred in the past few weeks (i.e., re-entering the market at a top and then having to de-risk again shortly thereafter due to declines).
SPEND: Real Spend
Stocks sold off heavily last week, while bonds finished essentially flat. Typically, bond prices rise when stocks are under pressure as investors seek relatively safe assets. However, investors’ interpretations of the Fed’s comments following the decision to raise interest rates may have offset the additional demand for bonds, and kept a lid on prices.
The new Fed Chairman reiterated last week that the economic outlook has strengthened. Inflation volatility has been largely non-existent, as the Fed has been effective at helping expectations stay in line with actual results. While inflation remains low, the market outlook for inflation is realistic and healthy.
Yield-focused investors were hit hard last week, especially in the equity space as both dividend-paying stocks and REITs plummeted more than 4%. Meanwhile, master limited partnerships were down nearly 6%. Fixed-income-based yield-focused investments also suffered losses, with high-yield bonds and emerging markets bonds down more than 1%. Only Treasury bonds finished up, albeit modestly, for the week.