Market Commentary - May 2019

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What About Bonds

While much of the spotlight has been on the breathtaking rally in equities, what has transpired in the bond market might be more impressive. Both are off to their best starts in a decade. The rally in equity markets has probably benefited from the massive spike in stock buybacks. US corporations were large beneficiaries from the tax cut and jobs act and on pace to buy back more shares than the record breaking amount in 2018. Bonds have benefited from the Federal Reserve signaling it would hold back on rate hikes for the foreseeable future. 

Of course this is all in stark contrast to the way 2018 ended. Similarly most of the headlines in the fourth quarter focused equities and their sharp decline. But, several bond classes were in the midst of one of the largest quarterly declines since 2008! 

It is likely the Federal Reserve and central banks helped put a floor on markets in the short term. The underlying issues of a slowing global economy coupled with rising deficits still exists and needs to be addressed in the coming years. Currently global debt sits at $244 trillion, which is three times the size of the global economy. Estimates are for this to increase over the next year. If rates are left low, corporations and governments will continue to borrow and the debt pile will swell. But, if interest rates rise, there could be difficulty servicing the debt which could lead the global economy to come to a screeching halt. Again, however, it is important to point out that economies and markets often go in different directions so these sort of concerns are more for tracking and watching and less for taking action.