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 benefitted 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.
For more of our thoughts on U.S. stocks, check out our latest .
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured. These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.
For Public Use | Tracking # 1-850390