Q2 Update: Stock and Bond Tug of War

Stocks have surged since their December lows and continue to ride an upward trajectory into the second quarter indicating investor optimism about economic growth. At the same time however, investors have demanded shorter-term bonds and shunned longer dated maturities pushing the yield curve to flatten and even invert – usually a good predictor of recession. So, do investors think the economy is poised for growth or contraction? The truth is probably somewhere in the middle. Earnings estimates for the current quarter are pretty low and many equity investors are betting that the bad news is already baked into the current price. Better earnings or positive guidance could compel stocks to jump higher. More cautious investors are pointing towards the age of the current bull market, international trade disputes (especially US-China and Europe-Great Britain), and Fed tightening actions as reasons to decrease risk. We see further economic expansion but with volatility along the way.

On a diversification note, the world’s stock markets are moving less in sync with each other than at any time in the last 20 years – meaning that owing a diversified portfolio across the globe makes sense again. The low correlation can increase risk adjusted returns and any pull back could be a good time to add to international positions for long-term investors.