Diversified investors just capped one of their best months of the current economic cycle.
In January, the S&P 500 Index posted its biggest monthly gain since October 2015. At the same time, the Bloomberg Barclays Aggregate Bond Index (Agg), which represents high-quality bonds, rose 1.1%, its second-best monthly performance in 2.5 years. As shown in the LPL Chart of the Day, U.S. stocks and bonds’ strong rallies led to the best month for diversified investors since October 2011.
Since 1998, the 10 best months for diversified portfolios— or a hypothetical portfolio with 60% in stocks and 40% in bonds–have typically preceded more positive returns for both assets in the following month. On average, the S&P 500 rose 3.2% after these months, while the Agg increased 0.4%.
“A rising tide lifted all boats last month as financial markets recovered from a rocky end to 2018,” said LPL Research Chief Investment Strategist John Lynch. “Still, we stress the importance of owning high-quality bonds for diversified portfolios, interest income, and liquidity.”
Fixed income may be especially important as a portfolio hedge in the upcoming year. As mentioned in our Outlook 2019, we expect the S&P 500 to climb this year, but we could see higher volatility as investors digest global headwinds and tightening financial conditions amid solid economic fundamentals and corporate profit growth. Bonds have outperformed stocks in all 14 S&P 500 corrections since 2008, including the most recent slide: The Agg rose 1.6% during the S&P 500’s 19.8% drop from September to December 2018.
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Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio’s credit worthiness, or risk of default. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.
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