Liquidity conditions have also improved significantly, as institutional investors have increasingly taken on risk following their de-risking during the fourth quarter.
Our equity allocations were led by emerging markets and a rebound in small-cap stocks. However, positions in large-cap growth stocks and Japan dampened performance somewhat.
Bonds also posted gains for the week, with all sectors moving higher. Corporate fixed-income securities performed especially well, while shorter-duration bonds were flat. The fixed-income portfolios remain overweight to shorter-duration credits, with a focus on high-yield bonds and senior loans.
The Federal Reserve Board appears to be on pause for the time being in terms of interest rate policy, which suggests rates are likely to be relatively stable. We are exploring opportunities among emerging markets debt.
PROTECT: Risk Assist
Yet another strong week for global equity markets means that December’s losses are essentially wiped out. Volatility expectations fell last week after U.S. companies continued to report solid earnings results for the fourth quarter. In addition, trade talks between the U.S. and China went reasonably well and the jobs report for January was outstanding—with new job creation running at a much stronger rate than expected.
SPEND: Real Spend
The U.S. equity market closed out January with its best return since 1987—and both domestic and international stocks were up around 8% for the month. Meanwhile, bonds rose 0.7%, with much of that positive return occurring after the Fed’s dovish comments last week.
The return spread between global stocks and investment-grade bonds is tightening as stocks rally from their lows during the fourth quarter of 2018. Bonds continue to outperform over the short term—up 3.2% during the past three months, versus a 0.3% return for equities. Longer-term, however, the return for global stocks during the past three years is 11.8%, versus just 1.9% for bonds.
Domestic dividend-paying stocks outperformed the broader market last week, while international dividend stocks trailed international markets slightly. Interestingly, dividend stocks have nearly kept pace with the broader market so far this year—despite the fact that dividend stocks are typically more defensive investments that often perform well during volatile markets and sell-offs (such as those we saw during 2018).
Meanwhile, inflation expectations remain low, but have risen by more than 20 basis points year-to-date to around 1.9% (as measured by 10-year TIPs and 10-year Treasuries).