by Connor Darrell CFA, Assistant Vice President – Head of Investments
U.S. stocks posted positive returns for the eighth straight week despite unexpectedly disappointing retail sales data. Stocks were primarily supported by optimism that the U.S. and China might make progress on a trade agreement before U.S.-imposed tariffs are set to more than double on March 1. Bond yields jumped higher to start the week but reversed course following the weak retail sales data released on Thursday. Bonds ended the week relatively flat as a result.

Starting Point Matters
We have consistently warned of the potential perils of attempting to time the market, and the past few months have only served to lend further credence to those warnings. But that doesn’t mean that investors should not consider point-in-time analyses when evaluating their long-term strategy.  Following the tumultuous end to 2018, markets have rebounded considerably, and risks now look evenly balanced.  We continue to believe that while recent economic data has sent mixed signals to investors, the probability of a U.S. recession in the near-term remains low. However, the reality is that we find ourselves in what is very likely to be the latter stages of the economic cycle, and this fact carries long-term implications for investors. Given the stage of the cycle in which we currently find ourselves, investors need to be aware that the long-term expected returns across asset classes look quite a bit lower than they did in the past. The successful implementation of an investment plan is a dynamic process that responds to the market environment. As such, in an environment where market returns will be lower, investors may need to consider saving more or spending less in order to stay on track.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets weakened a bit last week, posting mixed results after news reports suggested that U.S. and Chinese leaders are unlikely to meet before the “trade truce” expires on March 1. Sentiment across markets has remained far more positive than it was at the latter end of 2018, with credit spreads declining to their lowest level since November. Government bonds also fared well as yields continued to decline. The yield on the 10-Year Treasury Note dropped to close the week at 2.63%, down from its high of 3.24% back in November.

 How Bond Investing Has Changed Since the Financial Crisis
In the world of finance, everything is interconnected, and sometimes it can be incredibly enlightening to take a look at how a change in one area of the economy can have long lasting impacts on global financial markets. The post financial crisis monetary policy environment (marked by artificially low interest rates and high liquidity) has influenced nearly every corner of the economy and the investing world.  One major byproduct has been a significant shift in the composition of major bond indices, particularly the Bloomberg Barclays U.S. Aggregate.  Over the past 11 years, the yield offered by the average bond in the index has unsurprisingly come down, but the average maturity has also grown longer. Those longer maturities have increased the duration of the index, which is a measure used by bond investors to evaluate how sensitive an investment is to changes in interest rates (see chart provided by JP Morgan Asset Management).

To understand what has transpired, we need to assess the decision making of bond issuers. Low interest rates mean low borrowing costs for corporations, and that provides an incentive for businesses to seek longer term financing (in order to lock in lower rates for a longer period of time). This has changed the mix of securities that make up the index, leading to a higher proportion of longer-term bonds. Passive bond investors should be aware of the changes in the composition of the underlying index being tracked, as the risk/reward outlook for the Bloomberg Barclays Aggregate has become less attractive (lower yields and higher rate sensitivity). In the context of the active vs. passive debate, the proponents of active management may have the strongest argument when it comes to fixed income, where an active manager may be able to manage the tradeoff between yield and duration more effectively.