The new year has gotten off to a rocky but positive start. Over the past five years, the market has tended to rebound quickly from dips, as investors piled in and limited market losses. Last quarter, however, institutions de-risked and were not willing to buy on dips. With a new year, hedge funds and banks are likely to be ready to make new investments.
The price action during the past five to ten days has shown support for the market segments that got hit the hardest during much of the fourth quarter—a good sign. The economy remains strong, if not spectacular—and as long as it doesn’t deteriorate rapidly (which we do not expect) investors should find reasons to buy stocks.
We enter 2019 with a 20% allocation to emerging markets.
Bonds were relatively flat last week, although credit markets rebounded nicely on Friday following the strong jobs report and comments by Fed Chairman Powell. Investors shifted back into both high-yield bonds and senior loans. The lack of liquidity we saw in stock in stocks during the last quarter was also present in those areas of the bond market. However, unlike in 2015 and 2016, the companies issuing that debt are financially strong with solid balance sheets.
PROTECT: Risk Assist
Our volatility forecasts came in substantially higher this month than last, which will impact how quickly the models may de-risk or re-risk to avoid being whipsawed by rapid price movements. This period is similar to early 2016, when many Risk Assist models were 60% – 70% de-risked. Investing in partially de-risked models can be beneficial: if markets fall, the models have the ability to de-risk further; if markets rise, investing in a model that is re-risking over time can be similar to the concept known as “dollar-cost averaging,” but with the added benefit of volatility forecasting to guide re-exposure to the market.
SPEND: Real Spend
The stock market’s rally late last week helped boost the year-to-date spread between global equities and investment-grade bonds to 1.5%, in favor of stocks. The one-year spread currently has stocks trailing bonds by 9%.
Returns among yield-focused assets were particularly strong last week. Master limited partnerships were up 9% as oil and high-dividend financial stocks rose along with equity markets. Preferred stock was up 3% and high-yield gained more than 1.6%. Higher-quality fixed-income securities, such as Treasuries and mortgages, lagged.
All Real Spend Models were recently de-risked due to elevated levels of volatility. Additionally, Real Spend models currently hold 11 quarters of Spend—one quarter less than the maximum allocation.