Head of Global Asset Allocation

Weekly market insights from the Global Investment Strategy team

  • U.S. stocks have hit record highs since the election, but not all assets were in positive territory for the month of November.
  • Bond yields have risen, sending bond prices lower.

What it may mean for investors

  • Going forward, diversified portfolios should continue to hold varying quantities of equities, fixed income, real assets and alternative investments, depending upon the goals the portfolio is designed to achieve.

Download the report (PDF)

Asset Class Performance—November Was a Mixed Bag

Financial markets have moved significantly since the election. But not all assets have moved in the same direction. U.S. stocks are up, while international stocks, as a group, are down. Most bond prices are lower as yields have moved up in sympathy with higher expected inflation and interest rates. The U.S. dollar has been stronger than other developed-market currencies such as the euro and yen as relatively higher interest rates and growth favor the U.S. currency.

Chart 1. Asset Class Returns Since the Election Favor U.S. Stocks (11/8-11/30/16)

Chart of asset class returns since the election favor U.S. stocks (11/8-11/30/16). Contact your Relationship Manager for more information.

Source: FactSet, 12/2/16

Year to date, U.S. stocks and, in particular, U.S. small-company stocks (Russell 2000 Index), are among the top-performing asset classes. However, nearly all asset classes are positive, including high-yield bonds, emerging-market equities and U.S. and developed-market fixed income on a year-to-date basis. Only municipal bonds and developed-market equities show negative returns (Chart 2).

Chart 2. Year-to-Date Asset Class Returns (1/1-11/30/16)

Chart of year-to-date asset class returns (1/1-11/30/16). Contact your Relationship Manager for more information.

Source: FactSet, 12/2/16.

How Should Investors Respond?

Looking into 2017, we expect yields on longer-dated bonds to remain about where they are today as the Federal Reserve (Fed) gradually raises the fed funds rate. That means that bond investors are likely to earn a bit more in yield in the coming year than they did in 2016. We caution investors not to invest too heavily in very long-term bonds (more than 10-year maturities) as these bonds’ yields are still lower than historical averages. We could see significant negative price moves in these types of bonds if inflation expectations rise from current levels. Similarly, municipal bonds have repriced given the expectation of lower tax rates in the future (coupled with the Treasury-yield rise). We believe that the repricing in this asset class may represent an opportunity for investors in higher tax brackets.

U.S. equities may see bifurcated results as we head into 2017. We expect the positive growth trends in the U.S. to continue in 2017, and earnings growth also should see gains in the coming year. The stocks of larger companies should continue to move higher at least until midyear. However, smaller-company stocks may have already seen their upward adjustment, so we have valuation concerns that keep us underweight this asset class. International-stock returns have been combating both a rising dollar and the perception that curtailed trade under the new U.S. administration would be negative for economic-growth prospects abroad. We think these negative forces will subside in the coming months as investors turn back to fundamentals and away from speculation.

Real assets could benefit from modest inflation and any infrastructure spending that is implemented under the new U.S. administration. Much higher interest rates, however, would compete with real estate investment trust (REIT) yields and make financing of real-estate ventures more costly.

Alternative investments may benefit a portfolio should a more volatile market result as geopolitical stresses continue to impact financial markets around the globe. That is because certain alternative strategies are designed to hedge risks and provide absolute returns even when markets are in flux.

We believe that investors should evaluate their portfolio holdings in light of what they are designed to do within the portfolio. Stocks are considered the growth engines of a portfolio. If you have a "Growth" objective, you should be holding more stocks than other types of assets. Bonds are an important part of an investment portfolio, because they provide income and often stability in times of market unrest. If your objective is "Income," then we believe you should have a higher allocation to bonds in your portfolio. It should be noted, however, that bonds, while typically less volatile than stocks, also can experience declines in value, as we have seen in the month of November. REITs and commodities (real assets) can provide an inflation hedge and growth and income opportunities for investors. Alternative investments may provide a diversifying element to your portfolio. That is, they may not move in the same direction as traditional asset classes, thus helping to smooth (and potentially improve) your returns over time.