In the fixed-income markets, longer-duration bonds outperformed shorter-duration issues once again as rates fell slightly. High-yield credit again came under pressure as oil prices fell and as investors shifted their portfolios to higher-quality credits. Emerging markets debt also slumped as Latin American currencies continued to weaken.
GAIN: Active Asset Allocation
Markets saw continued weakness last week, along with further rotation away from growth-oriented sectors (such as consumer discretionary and technology) into sectors seen as relatively safe—a shift that may remain in place for a while. The lack of a sizable bounce in stock prices during a holiday week was concerning.
Our overweights to value stocks and emerging markets have been beneficial, while exposure to growth and quality factor assets have dampened performance.
Fixed-income markets were relatively stable last week; although, there are signs that stock market volatility is bleeding over into credit markets. While that is generally not a positive sign, the amount of stress currently in the credit markets is modest compared to similar situations in the past. The Gain fixed-income portfolios still have credit exposure—including high-yield and senior loan positions—but that exposure is smaller now than it has been for most of 2018, and we are monitoring the situation closely to determine if a further reduction in credit positions is necessary. Interest rates are at the bottom end of their recent range; any stability in equities should push them higher.
PROTECT: Risk Assist
Equity prices fell last week. As the markets re-test recent lows, we continue to monitor the portfolios for potential de-risking activity. Meanwhile, volatility expectations remain elevated (and our volatility forecasts confirm this). For example, the CBOE Volatility Index ended the week slightly higher than its long-term average.
SPEND: Real Spend
Stocks slumped during the holiday-shortened week, with global stocks down approximately 3% and U.S. stocks falling nearly 4%. Bonds, in contrast, were flat for the week. As a result, the one-year spread between global stocks and domestic investment-grade bonds is now -1.2%—meaning bonds have outpaced global stocks over that time period.
That said, a look at the domestic markets reveals a very different picture. The spread between U.S. equities and the broad bond market over the past 12 months remains strongly in stocks’ favor, at 5.2%. Investment-grade domestic bonds are down -2% during that time and have gained just 1.3% on average during the past three years—not enough to outpace headline inflation, which has averaged nearly 2% over that same time period.
In the yield space, fixed-income yield investments outpaced equity yield assets due to the sharp decline in equity prices. Long-duration bond prices were up nearly 40 basis points while some U.S. stock dividend strategies were down as much as -2.75%.
It’s worth noting that, based on a long history dataset, stocks are expected to outpace bonds about two-thirds of the time during any given one-year period, three-fourths of the time during any given five-year period,four-fifths of the time during any given 10-year period, and nearly all 20-year periods.