Diversified investors were the big winners in the first four months of this year.
As shown in the LPL Chart of the Day, both stocks and bonds have posted strong rallies through the first four months of this year, thanks to increased risk appetite and global demand for U.S. debt. The S&P 500 Index rose 17.5% through April, its best start to a year since 1987, while the Bloomberg Barclays U.S. Aggregate Index (the Agg) climbed 3%, its best start since 2016.
U.S. stocks’ swift rally was unusual. Bond prices’ simultaneous climb was even more out of the ordinary, though, as stock and bond prices typically trade inverse of one another. The S&P 500 has bounced nearly 25% from the December lows thanks to recovering economic data globally, improving prospects for a trade deal, better-than-feared earnings per share (EPS) gains, and the Federal Reserve’s rate hike pause. Meanwhile, U.S. fixed income has benefited from a wave of buying pressure amid lower rates and benign inflation readings globally.
“While we always appreciate rising asset prices, investors should be aware that stocks and bonds’ strong rallies have begun to stretch valuations in both asset classes. Consequently, we’re cautious on the near-term outlook. A rising tide lifted all boats in the first four months of this year, but stocks’ and bonds’ strong rallies have stretched valuations a bit in both asset classes,” said LPL Research Chief Investment Strategist John Lynch. “Stocks are ripe for some volatility, so we’ve tempered our near-term outlook.”
We maintain our year-end fair value target for the S&P 500 at 3,000, but we could see higher volatility over the next few months given the strength of the latest rally. We’ve already seen a little bit of that turbulence this week, with trade tensions flaring up again after the United States threatened additional tariffs on Chinese goods.
Even though historical correlations have broken down, fixed income could act as a vital hedge and liquidity source for portfolios in times of stock weakness for suitable investors. Bonds have outperformed stocks in all 14 S&P 500 corrections since 2008, including the most recent slide: The Agg rose 1.6% during the S&P 500’s 19.8% drop from September 20 to December 24, 2018.
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