Bond Market Outlook & May Market Performance
Key Points – Bond Market Outlook and May Market Performance:
- May equity market performance
- Year to date market performance
- Economic outlook for 2021
- What about inflation?
- Bond market outlook
- 5 minute read | 9 minutes to watch
What is happening in the economy and the markets? Is inflation here to stay? Or is it a temporary phenomenon? Join me for just a few minutes here as we talk about what’s happening in the markets and the economy, a bit on inflation, and a lot on bonds.
Bond Market Outlook & May Market Performance
Equity Market Performance
Figure 1 | Source: Chaikin Analytics
Alright, let’s get started with the latest month in the equity markets. Take a look at this Figure 1. May has had some negative numbers. April was off the charts positive, but as we go down this graph, here’s what we see for May so far.
We have the RSP, which is the equal weight S&P 500 and is the big winner for May, up 1.1%. The Dow Jones Industrial Average is slightly under 1%, followed by the S&P 500 and the S&P 100. And at the bottom of the pack, we have the Russell 2000. Above that are the S&P midcap, NASDAQ, and small cap 600.
Figure 2 | Source: Chaikin Analytics
I want I don’t want to focus just on the last month. What I want to do is I want to take a step back. And I want to show you a year-to-date chart here. So you’ll see some pretty interesting dynamics start to take place.
You have the S&P 600, the small cap up 19.56% year-to-date, that’s after losing 2% in the month of March. In line with that is the S&P equal weight at 17.28%. Lastly, we have the NASDAQ 100 is still trailing all the other indexes on a year-to-date basis.
Remember, the NASDAQ was the darling of last year with all the high-flying technology stocks racing due to what was going on in COVID.
Will These Equity Market Returns Continue?
So we’ve got some good equity returns really across the board on a year-to-date basis. The question is, will those equity returns continue? Or will they stabilize? Or are we in danger of going backward?
Economic Outlook for 2021
So when we look at things from an economic perspective, things look great. We should wind up with a good solid economic expansion this year, unemployment continues to drop, and we see people getting out and about and doing more. The COVID hangover is beginning to wear off.
Yes, I do believe that the economy will continue. Will that economic growth translate into growth in the equity markets? I think that a lot of what’s happened in the equity markets may already be baked in for the next six, eight months.
It could be that these numbers are where we wind up for the rest of the year. That remains to be seen. We’re watching everything very closely to determine whether or not we should start to trim equity positions and load up in some other attractive areas.
What About Inflation?
So, could what is happening in the economy cause inflation? Just this week, the Two-Year Treasury Auction said just the opposite. It said, “Hey, you know, this inflationary thing that we see right now is very temporary.” That’s exactly what the Fed has been saying, and it pointed more to a deflationary type of cycle.
When you look at what’s happening in the bond market, which we will, I think it’ll help explain where you should be and what you should be looking for out of the bond market. Remember, if interest rates rise, typical bond values will fall, but not all bonds.
So I just like stocks aren’t all the same, funds aren’t all the same, and ETFs aren’t all the same. Not all bonds are the same either. Let’s take a look.
Bond Market Outlook
Bond Market May 2021
Figure 3 | Source: Kwanti
In Figure 3, we’re starting with four very different types of bond holdings. The first one that we’re going to go through here in purple is a diversified bond fund. I’ll go into the details on that here in just a second.
Just below that, you have the HYLD in orange, which is high-yield. Just below HYLD over the last month, you have AGG in blue, which is the bond aggregate. That’s corporate bonds. Then TLT is down in green, and that is the 20-Year Treasury.
Over the last month, 20-Year Treasury is following HYLD, AGG, and the diversified group.
Bond Market 2021 Year-to-Date
Figure 4 | Source: Kwanti
I want to back this up on a year-to-date basis in Figure 4 so that you can see what has happened here. HYLD is the big winner on a year-to-date basis, up 4.36%. HYLD is followed by the diversified bond fund of PONAX, AGG, and then the 20-Year Treasury, down -11.12%.
So when you think about the fact that when interest rates rise, it hurts bonds. It doesn’t hurt all bonds the same. The longer the maturity on the bond, the more that rise in interest rates hurts it.
So the TLT has been really hammered this year, because of what’s going on with Treasury yields increasing by about 55 basis points, or about point five 5%. So we haven’t seen a huge increase, but that has still knocked that TLT down.
Bond Market Last Three Years
Figure 5 | Source: Kwanti
Now, if we back this up in Figure 5 to a three-year view, you begin to see some things that look different. TLT is up 23.99%. But look at where TLT was in August of last year, up 49%, now only up by 24%. So that got hammered.
You go back here on the high yield by April 3rd of last year, negative 25%. Now positive 10%, that means up 35%. Since March of last year, or April of last year, when the pandemic hit a slow, all these bonds will react differently. If you look at the purple line, that’s the diversified portfolio. So let me show you what that what is in that bond fund.
PONAX Diversified Bond Fund
Figure 6 | Source: Kwanti
So in PONAX, you have high-yield US bonds, inflation-protected bonds, you have non-US bonds, cash, and investment-grade US bonds. You’ll notice that they don’t own any government bonds right now.
HYLD, AGG, and TLT
Looking at the HYLD, you have unclassified bonds, non-US bonds, and high-yield bonds. Typically, the unclassified bonds are bonds like senior secured debt or mortgage-backed securities.
The AGG is primarily investment-grade, corporate cash, and a little bit of non0-US bonds. Of course, the TLT is 100% 20-Year Treasuries. How you mix and match the bonds inside your portfolio will dictate what we see as far as performance.
Bonds are Vital to Proper Financial Plan
By and large, bonds have struggled a little bit this year. But always remember this: Bonds are a crucial part of a portfolio. And if handled properly, bonds can be what we will call stay-rich investments. Stocks are always thought to be a get-rich investment. Bonds are always thought to be a stay-rich investment.
So with that, it’s crucial that you have the proper diversification inside of your portfolio. The only way you can determine that diversification is by matching it to your financial plan.
Ask Questions, Stay Informed
So I encourage you, as always, to talk to your financial advisor, ask whatever questions you have, look at the allocation within your portfolio. How does it match up within your overall plan? Are things on track?
If you’re a client, I know we reach out to you very frequently throughout the year to see if you have questions and invite you in for reviews. It’s important that you keep the line of communications open with your financial advisor.
I appreciate you spending a few minutes with me here for the Monthly Economic Update. I’ll be back with you next month.
Dean Barber Founder & CEO
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Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.