For the first time since February, the S&P 500 index reached an all-time high. The Index closed at 3,397 on Friday, which represented a weekly gain of 0.77% while moving the index up 6.47% year-to-date. The Russell Midcap Index and the Russell 2000 index, which measure performance for mid to small cap companies, retreated for the week losing 1.05% and 1.59% respectively. International equities also lost ground as developed and emerging markets returned -0.99% and -0.10%, respectively. Finally, the yield on the 10-year U.S. Treasury moved lower finishing the week at 0.64%, down 7 basis points from the week prior.
Minutes from the Federal Reserve’s (“Fed”) latest policy meeting were released last week. As a result, we felt it appropriate to dive into the fixed income asset class due to its relation to the Federal Funds Target Rate range. The minutes indicated that the Fed felt there was no rush to clarify any guidance on the future trajectory of rates, other than maintaining their belief that rates will likely remain low for an extended period of time. The path forward is extraordinarily uncertain, businesses face high levels of risk, and the road to recovery and added clarity depends on the successful containment of COVID-19.
Policy decisions and backstops provided by the Federal Government and Federal Reserve have helped bolster fixed-income prices across an array of categories. While there are other contributing factors influencing prices, the fact remains that yields remain at historic lows. Income production within a portfolio, whether it be through interest or dividends, is extremely important to income-oriented investors. Where should these investors turn when yields such as the 10-year U.S. Treasury are just 0.64%?
Source: Bloomberg as of 8/20/20
There are options within traditional fixed income, and ways to manage portfolios, to help provide for sustainable levels of income production. Some traditional areas of fixed income include government, corporate and municipal bonds. When investing in these traditional areas of fixed income, there are two primary risk factors to consider; credit risk and interest rate risk. Following the familiar investment principle that adding risk should equate to higher return potential, increasing credit risk and/or interest rate risk can often help increase yield potential. However, investors should first understand the risks involved and then make sure that these risks are consistent with their own risk appetite before reaching for the higher yield potential that certain investments may offer
Additionally, investors can look outside of traditional fixed income asset classes to areas such as preferred securities, convertible bonds, Closed-End Funds, or even stocks, to help provide income potential to an investment portfolio. Keep in mind that these other areas have their own unique risk characteristics that should be understood and weighed accordingly. Due to the complex nature of the capital markets overall, we encourage investors to consult with an experienced financial professional and/or work with experienced fund managers when making these types of investment decisions while working within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
We recognize that these are very troubling and uncertain times and we want you to know that we are always here for you to help in any way that we can. Please stay safe and stay well.
Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 8/21/20. Rates and Economic Calendar Data from Bloomberg as of 8/21/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index.
Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against loss.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than the original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.