For those who had a "safe" portfolio
skewed to bonds before the election, it was a disaster month. For those who
were stock-pickers in value and small cap, it was a dream market. The return differential
between bonds (TLT) and value (IWN) was more than 20% in one month. Call it a
"Trump Rally / Trump Bond Sell-off", but the financial world changed
beyond politics. This sound bite story may be getting old, but there is a lot
going on in markets beyond being long stocks and short bonds.
What is noticeable is that the equity gains in the
US were not a global phenomenon. Some of the global underperformance was clearly
dollar related, but the US election rally was not shared by the rest of the
world or by the large cap firms that are more active in global trade and have
more earnings from overseas operations. The large cap/small cap return differential
as well as the value and growth differentials were all especially strong.
Respectively, small caps, value, and growth indices beat the SPY monthly return
by approximately 7.5%, 9.5% and 5%. This is consistent with an economic growth
rally and a reduction in regulation rally.
Bond duration hurt all investors with TLT
underperforming the Barclay Aggregate (AGG) by over 5.5%. High yield demand
increased and higher spreads cushioned the duration risk for this sector;
however, higher quality corporate bonds saw a strong decline. This is
consistent with the small cap return skew in equity returns. International and
emerging markets bonds both lost money from the global rate rise and a strong
dollar.
The year to date performance does not do justice to the wild swings we
have since the first two months of the year. After impending disaster with a
strong equity sell-off, stocks have done well and have clearly outperformed
bonds.
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