The 1980’s had the best music and the best alternative/rock hair styles. I dare anyone to say otherwise. One of my favorite groups during my “alternative” phase was “The Cure,” and they are the inspiration for this month’s title. The song is a reflection of a relationship gone awry; and while you think this may be a stretch, read on. It will make sense at the end.
There has been a lot of discussion regarding the move in the 10-Year Treasury Note for the month of March: falling over 10% from a yield of 2.7% to a yield of 2.41%. This move in yields has become even more concerning because the yield curve (an indicator of the economic cycle) has flattened; and this means that investors are willing to accept smaller returns further out as the prospects for stocks is less than stellar.
Currently, even with the bond market showing signs of concern, the first quarter performance of 2019 was one of the best for US stocks in almost a decade. Growth companies continued to see strong gains and capital markets have continued to be open for business-just look at the slate of companies expecting to “go public” in 2019! Equities have had the wind to their backs helped by Fed Chairman Powell’s declaration that further rate increases during the year seem unlikely.
The Fed’s comments also helped the credit markets when it implied it was taking a more dovish stance in terms of rate increases during 2019. But, the best performers in credit were more quality-focused; for example, the 10-Year Treasury generated 2.84% for March and is up 3.07% year-to-date. High Yield performance was also up for the month, but only up approximately 1% (High Yield is up 7.4% for the year). The overall barometer for Fixed Income—The Bloomberg Barclays US Aggregate Bond Index generated 1.92% for March, and is underperforming the 10-Year Treasury on a year-to-date basis. Investors seem to be finding solace in getting less for some of their allocation and strategists believe the markets are sending a signal.
On the economic front, further breakdown of the most recent Gross Domestic Product shows that residential investment was 3.8% (of total GDP), below the average of 4.4%, and Household Net Worth has steadily climbed to almost 1.5x where it was during the Financial Crisis. Unemployment is in the 3.8% range while wage increases are up 3.5%; but most of the growth in GDP has come from output per worker and not adding more workers. This is something that could have an effect on the unemployment number in months ahead. Inflation has remained below the 50-year average (at 1.5%), and with the White House expecting the economy to grow 3% many wonder why the President wants Fed Chairman Powell to cut rates. Still, economists believe the Federal Funds rate will remain where it is for 2019 and possibly move lower in 2020 if GDP gets below 2%. But for now-as mentioned in February- these data points suggest the economy is in “Goldilocks mode,” neither too hot nor too cold.
Through the month of March, all indices remain positive for the year. As to be expected, Small Cap Equity funds have seen the best returns, but were only slightly ahead of their Larger Cap peers when comparing indices. Growth Funds-Large or Small-continue to provide outsized returns in Equities; and while higher quality Fixed Income outperformed in March, High Yield is still providing the best returns in the asset class. It can be expected that Small Cap Growth and should continue to do so if liquidity is still available in the marketplace. International funds have also experienced a recovery during the first quarter, providing returns in the high single digits during the first quarter.
For the first quarter of 2019, an asset allocation largely comprised of equities versus bonds--usually a 60/40 split—would have generated a mid- to high-single digit return for investors. But, as good as the beginning months have been for 2019, data does suggest that Equities may have a hard time continuing at this pace. And this is exhibited by the yield curve; the yield curve maps the rates of Treasuries with different maturities extending from 3 months to 30 years.
A flat Treasury curve, as seen below, suggests that the investors remain concerned of the future, with the difference between the 10-Year bond and the 2-Year bond being only 20 basis points; historically this was over 2% (or 200 basis points)! So, to paraphrase the song regarding the markets for the rest of the year: “Misjudged your limits, pushed you too far, took you for granted, I thought you would never fall…Oh, bonds don’t lie!”
Well, if bonds don’t lie, then one should look for an opportunity to increase exposure to the asset class. But, as always, one should consult with their financial advisor to help create an asset allocation that is appropriate for them and their circumstances.
Be sure to consult your financial advisor with any questions regarding the markets and investments. For more information about LHT Consultants as well as to receive more updates on the markets, please visit us at www.lhtconsultants.com.