Expectations have diverged in 2019, as equity markets welcomed a dovish Fed, while the bond market exhibited pessimism. In the second quarter, the S&P 500® finished up 4.3% despite ongoing trade tensions, while the yield on the 10-Year U.S. Treasury Bond fell 40 bps to 2.0% and the U.S. Treasury curve remained inverted.
The S&P Risk Parity Indices, which aim to spread risk equally across equities, fixed income, and commodities, have continued their strong start to 2019. New highs in the first quarter were followed by new highs in the second quarter, as equity and fixed income correlation remained positive.
Exhibit 3 shows the performance of the S&P 500, the hypothetical global 60/40 portfolio, and the S&P Risk Parity Indices across each of the past three quarters. The S&P Risk Parity Indices kept pace with the S&P 500 and outperformed the global 60/40 portfolio in the second quarter of 2019.
The significant outperformance the S&P Risk Parity Indices posted cumulatively over the past three quarters is noteworthy. While the S&P 500 came roaring back in 2019—recording its own highs—the net effect of its large drawdowns in the fourth quarter of 2018 led it to underperform across the entire period.
Next, by examining the performance attribution across the S&P Risk Parity Index – 10% Volatility Target in Exhibit 4, we can see that the second quarter gains came from equities and fixed income. Equities survived a mid-quarter wobble to finish the quarter strong on the back of easing trade tensions and growing dovishness among policymakers. Fixed income posted a strong second quarter, as yields fell markedly and prices rose.
Examining the performance attribution across the past three quarters in Exhibit 5, it is clear which asset class was responsible for driving the indices to new highs. The fixed income component posted three solid quarters on the back of the rally in U.S. Treasuries. Meanwhile, commodities and equities have yet to completely reverse losses from Q4 2018.
As we look ahead, it will be interesting to see how contrasting sentiments across equities and fixed income play out in the coming weeks and months. However, regardless of where markets end up in the short term, the S&P Risk Parity Indices’ objective to maximize diversification benefits across complementary asset classes could be a recipe for success in the long term.