The first quarter of 2019 has begun with a bang. Following the fourth quarter swoon that left all major markets looking for safe harbour, stocks managed an unprecedented reversal and recovered most of the losses since October 2018. The recent optimism on benign interest rates and potential trade resolution overcame fears of slowing growth of corporate earnings. Indeed, both major U.S. and Canadian stock markets, represented by the S&P 500 and S&P/TSX indexes, respectively, surged more than 12% higher in the 3-month period. In fact, that was the S&P 500’s best quarterly gain in nearly 10 years and its best start to the year since 1998 (CNBC). And while it may not be likely we see another quarterly performance so strong any time soon, investors ought to know the history of similar hot starts before thinking it’d be a good time to sell the relief rally. According to analytics firm Kensho, the S&P 500 has risen by more than 10% in the first quarter just 4 times since 1990, and in those years, it went on to trade higher for the rest of the year, averaging a 10.3% gain over the remaining 3 quarters (CNBC). Furthermore, despite the strong gains in Q1 both indexes still sat about 3 or 4% below their all-time highs set in 2018, which highlights the extent of the damage inflicted on the markets toward the end of last year.
There are no shortage of age-old traditional investing principals or tenets that, for the most part, still ring true to this day. Some of these include: buying undervalued companies or selling overvalued ones, favouring long-term developments over daily headlines or news, focusing on fundamentals and data rather than investor sentiment, staying diversified to mitigate sharp or extreme losses, and the list goes on. But one philosophy that was seen a gold standard for decades and a fixture in nearly all portfolios has become less and less relevant in today’s economic environment. Government bonds.
Both Canadian and U.S. Government bond yields have been in a steady free-fall since the early 1980’s where they peaked at over 15%! Compare and contrast those yields to today, when U.S. 10-year bonds are yielding around 2.5%, while our Canadian counterpart yields closer to 1.5%. The difference is staggering. Even when considering the low inflationary environment, these yields leave you with a real return (inflation-adjusted) of next to nothing and sometimes even with losses. It just hasn’t made much sense in this environment to have much exposure to this asset class. Advisors and portfolio managers are left to hunt for better yields that can deliver their clients a steady, reliable source of income, while hopefully maintaining a lower risk profile to complement their equities brethren.