Rationality of Bonds

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About February

U.S. stocks rose by 3% during February, and are now up by 2% for the year, but it feels like a down market because stocks fell by 3% over the last two days of the month. It’s a good reminder that volatility will never be absent from the stock market, and particularly with an uncertain economic recovery, one should be wary of risks we described in our 2021 outlook. Developed international and emerging market stocks also enjoyed modest gains for the month.*

Most companies in the S&P 500 have reported 4th quarter earnings, and as was anticipated by the consensus of security analysts, earnings declined from the prior quarter. The forecast from that consensus of analysts is that earnings will rise throughout the year, with 4th quarter 2021 earnings expected to be 20% higher than the 4th quarter of 2019.** That expectation is largely the basis for the growth in stock prices since April -- stock market performance will be mostly driven by how close those forecasts come to being realized.

The Quiet Market

Most headlines in the financial press are typically about stocks, but we do want to pay some attention to bonds. Bonds provide at least one-third of the portfolio for most of our clients, and for many they comprise the majority of their investments. Candidly, they just aren’t as exciting to discuss as stocks because their movements are less dramatic – but that dullness is exactly why they’re an important component of an investment strategy.

First a confession. Sometimes, late at night, when I’m alone in front of my computer, I quietly click on that obscure website that lonely people are known to visit – the U.S. Department of the Treasury yield curve rate page. As we pointed out last July, the yields on long-term Treasury bonds were ridiculously low, with 10-year bonds yielding 0.69%. However, those long-term rates have slowly and steadily been rising, and last week the ten-year rate had more than doubled to 1.44%. Interest rates beyond three years were at least as high as their pre-pandemic levels. Earning those modest yields is not a prospect that investors can get truly excited about, but it’s a positive sign that rates are moving up towards, and hopefully eventually beyond, the current level of inflation.

Particularly because of those low yields, we believe that diversification beyond Treasury bonds is necessary for a bond portfolio. Allocations to other sectors of the bond market, such as investment grade corporate bonds, mortgage-backed securities, high yield (non-investment grade) bonds, and emerging market bonds, can be used to increase yield and return. As is the case with stock holdings, it’s important to carefully construct the mix of those sectors to take advantage of diversification opportunities and to limit the amount of portfolio volatility.

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* Source of returns is Morningstar, Inc., and Yahoo Finance. Past performance is not indicative of future results.

** Source: S&P Dow Jones Indices

This update is provided by Savant Investment Group, LLC (“SIG” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this report is derived from sources that SIG believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

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