by Connor Darrell, Head of Investments
U.S. large cap stocks reached new all-time highs last week as both the Dow Jones Industrial Average and the S&P 500 managed to climb above their January peaks. Financial stocks led the way due to an increase in longer-term bond yields, which bodes well for bank margins. It was also a nice bounce back week for international stocks, with both developed and emerging markets equities climbing well over 2%.
Bonds produced modestly negative returns as the yield curve steepened considerably. The yield on a 10-year U.S. Treasury bond now stands at 3.07%, and the Federal Reserve is widely expected to increase interest rates following its meeting this Wednesday. Bond yields could continue creeping higher depending on Chairman Jerome Powell’s post meeting comments on future policy decisions.
Watching Only the S&P 500 Doesn’t Provide a Complete Picture
The S&P 500 is up more than 11% in 2018, climbing higher as a result of a healthy economic backdrop. However, after leading the way in what was a strong 2017 global equity market, foreign markets have struggled to keep pace in 2018. Emerging markets have been troubled by a strong dollar and some major uncertainty in some regions (Brazil, Argentina, and Turkey have been the main culprits), and developed markets have also struggled as economic growth has cooled in Europe.
Investors who (prudently) own a broadly diversified global portfolio may feel somewhat disappointed in their returns thus far this year, especially if they are using the S&P 500 as their benchmark (which we don’t recommend). But it is good to remember why diversification is so important, especially as U.S. equity markets are near all-time highs. An allocation to international stocks was additive to returns in 2017, and while that leadership was short-lived, it is impossible to predict when the pendulum will swing back the other way again. We don’t know when the next crisis will occur, but we can be virtually certain that it will eventually happen. As investors, the best thing we can do is own a variety of uncorrelated assets with positive expected return over our investment horizon.