April proved to be a solid rebound for the global equity markets and our confidence in equities outperforming fixed income grew throughout the month. Developed markets and US stocks were up for the month, while emerging markets were slightly down. On balance, developed markets and US equities gained 2.07% and 0.38% respectively, and EM ticked down slightly by -0.41%, in US dollar terms. The broad rally in developed markets could be attributed mainly to encouraging global economic data, a stellar earnings season in the US and lower market volatility (the VIX index retreated from the low 20s to 15).
Contrary to stocks, fixed income was generally down as an asset class for April. Rising interest rates were responsible for the underperformance of bonds in the US and across the globe. Fixed income fell -1.68% in aggregate. In the US, fixed income fell -0.80% due to underperformance in the Treasury market. Indeed, Treasury yields drifted higher and the curve continued its bear flattening trend. Furthermore, for the first time since 2014 the 10y US Treasury touched 3%. Within credit, investment grade corporate bonds produced a negative total return of -1%. On the contrary, high yield outperformed and returned 0.74% due to earnings and higher oil prices.
Change in US Treasury yields during April 2018 (bps)
Short-Term Market Outlook
For now, we continue to be cautiously optimistic on risk assets. Our tactical models currently assign a 60% probability of stocks outperforming bonds, and 79% probability of stocks outperforming cash in the US in the short-term. Driving this view is a recent uptick in our propriety leading economic indicator coupled with the recent stabilization of 10y US Treasury yields. In fixed income, high yield also continues to look favorable versus investment grade.
Subjectively, we believe that there is upside that could strengthen our conviction in equities over the course of May. First, the global macro backdrop appears to be on solid footing with economists projecting persistent growth in 2018. Global growth positively influences our proprietary leading indicator which, in turn, supports our equity outlook. Secondly, while interest rates have risen, credit conditions are still loose by historical standards and corporations are not grossly over-levered. Lastly, 10y US Treasury yields have stabilized and look to be fairly valued at this point in time. A range bound 10y US Treasury effectively reduces the impact that interest rates have on our valuation models.
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The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI Daily TR Gross EAFE USD Index; U.S. Equities represented by the S&P 500 Total Return Index; Japanese Equities represented by the MSCI Daily TR Gross Japan Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; U.S. Treasuries represented by the Bloomberg Barclays U.S. Long Treasury USD
QSCR 18138 (May 2018)