By Randall W. Forsyth
Photograph by Shane Stroud
Lazy, hazy, crazy days of summer?
August certainly was crazy for the global financial markets, and the outlook is unquestionably hazy as the season unofficially ends with Monday’s Labor Day holiday. Lazy might have been the best investment strategy, however, if that meant setting and forgetting a diversified stock-and-bond portfolio.
August saw wild swings in the U.S. markets, buffeted by the three Ts: tweets, trade, and Treasuries. Through Thursday, the SPDR S&P 500 exchange-traded fund (ticker: SPY), which tracks the U.S. large-capitalization market, had a total return for August of minus 2.85%, according to Morningstar data. That surely stings most readers.
The iShares Core U.S. Aggregate BondETF (AGG), which tracks the benchmark for the taxable-bond market, returned a positive 2.73% in the month, as U.S. bonds slid in reaction to the jump in negative-yielding global bonds to $17 trillion, an increase of $3 trillion in the month.
But a traditional 60% stock, 40% bond portfolio, using these ETFs, would be down just 0.62%—not bad, given the recent volatility.
For the year through Thursday, a 60 SPY/40 AGG portfolio would show a sparkling return of 14.45%, consisting of 18.16% from the equity side and 8.89% from the debt portion. But for the past 12 months, the 60/40 portfolio returned 5.53%, better than the 2.37% from the stock side, benefiting from 10.26% from the fixed-income side. Score one for old-fashioned diversification.
Whether that will work quite as well as the markets head into their most treacherous time of the year is another matter.
History shows that, since 1950, September has been the worst month for the Dow Jones Industrial Average and the S&P 500, according to the Stock Trader’s Almanac, and the worst for the Nasdaq Composite since its inception in 1971. If anything, the history has been even worse in years preceding presidential elections.
The conundrum facing investors is that bonds that have rallied in price (and fallen in yield) may provide less protection now to equity portfolios.
The collapse in Treasury yields, to about 1.5% for notes due in 10 years and below 2% for 30-year bonds, already incorporates expectations that the Federal Reserve will lower its benchmark rate three times, in one-quarter-percentage-point increments by next spring, from the current 2% to 2.25%.
The headlong dive in global bond yields has prompted calls that U.S. Treasuries could also be headed to zero yields. That would mark an apt contrast to predictions that bond yields could only rise further as they peaked at 15% in 1981, as Jim Grant points out in his column this week.
Never say never, but Evercore ISI’s capital markets maven, Stan Shipley, notes that technical and fundamental factors suggest a reversal of the bond rally—assuming that the U.S. doesn’t fall into a recession, which he sees as having just a 30% probability.
The inverted yield curve—with the two-year Treasury note outyielding the 10-year—is sending the strongest warning signal. But consumer spending, which accounts for upward of 70% of the U.S. economy, remains robust. That reflects the employment situation, certainly something to celebrate this Labor Day weekend.
As Wall Street heads back to work, the main event will be the August jobs report, due out on Friday morning. The consensus call is for a virtual replay of the previous month’s numbers, which showed a 164,000 rise in nonfarm payrolls, with 148,000 in the private sector; a 3.7% jobless rate; and average hourly earnings up 3.2% from the level a year ago.
Those numbers wouldn’t stand in the way of a rate cut at the Sept. 17-18 Federal Open Market Committee meeting, and Fed Chairman Jerome Powell may provide further hints in a speech scheduled later on Friday in Switzerland.
The twists and turns of the trade fight, meanwhile, will keep everybody on edge.
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