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Will an "unsustainable" rally in stocks and bonds prolong a weakening quarter for sleep-easy portfolios?




For investors who followed a "sleep-easy" portfolio balanced between equities and bonds, the compulsory amount in both assets in the first quarter of 2019 has delivered close to double-digit returns.

Nevertheless, market participants say these gains have resulted in stock and debt returns being sent contradictory signals over the US economy, with the increase in stocks indicating the recent downturn, only remaining a soft update, although the rise in bond prices and slips in dividends implies a more pessimistic outlook for the rest of the year. This difference between stocks and returns goes against the economics theory book, questions about how long this favorable environment for both risk and port assets can last.

"The truth may be somewhere between what stocks and bonds say. But it is unsustainable," says Franck Dixmier, head of global interest on Allianz Global Investors, to MarketWatch.

: The traditional stock price relationship disappeared in 201[ads1]8, spelling problems for investors

Analysts say that the driver of these investment rich countries has been a dramatic breakdown of the positive correlation between equities and bond yields in 2019 – as stocks rise, bond prices fall and yields increase, a positive correlation reflects when two indicators move in synchronization, while a negative correlation shows when they move in the opposite direction.

Opinion : Stocks predict boom, bonds predict bleak, – which signal should you believe?

Bonds and shares have raised in 2019 after a tough ending to last year, and deliver double-digit gains in the best quarter for e. a so-called 60/40 portfolio since the financial crisis. A balanced fund that puts 60% of its assets in the S&P 500 index

SPX, + 0.46%

and 40% in 10-year government bonds

TMUBMUSD10Y, -0.75%

yielded a return of around 10% in the first three months of 2019, according to Arbor Research & Trading.

S & P 500 is over 15% this year, while the 10-year yield on government bonds is down to nearly 20 basis points, and more than 70 basis points lower since the benchmark hit several years in November. But since the end of March, the dividends have had a steady comeback, climbing to 2.50% from a more than two-year low of 2.39%. The bond prices, conversely, move to yield dividends.

"Deep negative correlation between US stocks and treasuries has highlighted balanced portfolio," wrote Ben Breitholtz, analyst at Arbor Data Science.

Balanced funds are built on the basis of a positive correlation between the prices of stocks and bond yields, with the idea that weakness in one corner of the portfolio will be offset by strength in the other, and hence the sleepy label.

It has not prevented balanced funds and the 401K plans to take advantage of the double-rally, although it leaves much of Wall Street confused, uncertain whether bonds or stocks are right on the economic outlook.

However, Breitholtz said the predictive power of government debt rates and stocks is over-rated, with both showing a poor record of predicting where US growth is heading.

In the chart below, he shows both the implicit annual growth rate from both the S & P 500 and the Treasury dividends are often unaffected by the annual bills readings of the US gross domestic product.


Furthermore, it is not likely that the mixed signals will last, if only because history shows times when the stocks rise and the yields fall, cannot tolerate for long periods, even though they occur quite often. Analysts in Société Générale found 44% of the quarters since 1988, have seen both global bond and stock markets rally.

To be sure, Breitholtz said periods where both properties thrive, usually occur when the central bank refrains from signaling and implementing additional policies Shift, very much environmental investors are in now.

After the central bank suggested it would pause further interest rate movements in January, the Fed reduced its interest rate hike in 2019 to none in the March meeting, from a previous two outlook in December.

This double, double-sent dividend fell to the point that 2-year government bond yields

TMUBMUSD02Y, -0.16%

sensitive to the Fed policy outlook, now reaches a few base points during the daily earnings fund, indicating that bond buyers currently see more monetary easing than the probability. 19659002] But with economic data in China and the US expected to stabilize in the second half of the year, the bond market may not expect continued Fed inaction, especially if inflation begins to percolate back into the economy. It can ultimately adjust the yields with the stock market's pioneering groundbreaking, said Dec Mullarkey, Sun Life Investment Management Investment Strategy Investment Manager.

Things to look out for next week

In the future, investors will get hold of the March consumer price inflation on Wednesday, along with the minutes of the Federal Open Market Committee's March meeting. The protocol could reveal under what circumstances the Fed could break away from their patient position.

The European Central Bank will also hold a meeting on Wednesday. The ECB has faced a worsening of financial data, including a weaker than expected German industrial order this week.

British Prime Minister U.K. Theresa May returns to Brussels to push for further expansion to Brexit. Without delay due to U.K. to leave April 12.

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