In April, headline fears took a back seat as investors focused on corporate and economic fundamentals. As we have often said, it's the facts on the ground that ultimately determine how companies and their stocks will perform over time.
The so-called "fear index," the CBOE Volatility Index (VIX), fell 19.6% in April-the biggest monthly drop since President Trump was elected. But make no mistake, we expect the alternating pattern of fear-based selling that drives the VIX higher and fundamentals-based rebounds that cause it to decline to persist throughout the year.
The good news: Over 70% of S&P 500 companies that have reported earnings exceeded already elevated expectations. If the current trend continues, we'll see the highest percentage of positive surprises since 2008.
With the pace set for a record-breaking earnings season, many investors are wondering why stock markets were only up fractionally in April-the S&P 500 index returned just 0.4% for the month. Overseas, emerging markets continued to falter in reaction to tariff concerns, falling 0.4%. Developed foreign stocks, as measured by the MSCI EAFE index, fared better with a 2.3% gain.
Why the meager gains? In short, we think traders bought early on the rumors (or expectations) of strong first-quarter earnings; the trend then turned to moderate selling as companies met expectations. Also, geopolitical concerns, unresolved trade disputes, ongoing Russia-related investigations and the possibility of rising inflation continue to cast a pall over near-term forecasts for economic and earnings growth.
The bond market's decline and the 10-year Treasury's rise to a 3% yield mid-month-a level not seen in over four years-weighed on traders' psyches, though we think the concerns are entirely psychological and meaningless in determining the relative attractiveness of stocks versus bonds.
When we consider earnings, interest rates and economic data, we see a slow-growth, not no-growth global business environment. Based on current conditions, we believe stocks continue to have stronger intermediate- to long-term growth potential than bonds.
Energy's 9.4% return made it by far the leading sector for April, as these stocks were boosted by rising oil and natural gas prices. Positive global supply-and-demand dynamics, supported in large part by big producers' concerted effort to limit inventories, plus geopolitical tensions, have helped sustain higher energy prices. A colder-than-average and seemingly never-ending winter in the northeast U.S. helped drain natural gas supplies and aided related stocks.
Technology stocks eked out a 0.1% gain in April despite posting great earnings results. Investors and traders were concerned with increased regulatory scrutiny on the sector and the possibility that the group's stellar earnings were already priced in. Tech stocks are still showing a respectable 3.6% return year-to-date, but consumer discretionary stocks overtook the top ranking for the year following a strong month, returning 2.4% in April for a 5.5% gain in 2018.
High-yield bonds led a lackluster month for fixed-income markets. The Bloomberg Barclays U.S. Corporate High Yield index gained 0.7%. Strength in the energy sector and increased mergers-and-acquisitions activity propped up lower-quality fixed-income securities, while higher rates dragged down most other bonds. The Bloomberg Barclays U.S. Aggregate Bond index fell 0.7%, and the U.S. Treasury index declined 0.8% for the month. Emerging-markets bonds slipped 1.5%.
Built stock-by-stock, from the bottom up, our Dividend Income portfolio is overweight companies in the financial and health care sectors, and has a lower-than-market exposure to interest-rate-sensitive sectors like utilities, telecom and real estate. The current dividend yield on the portfolio is approximately 2.4%.
Our Global Tactical Balanced strategy remains in its most aggressive posture, with 80% of the portfolio invested in stocks. Our holdings are particularly focused on U.S. technology companies and the emerging markets. Non-U.S. corporate bonds and Treasurys make up the portfolio's fixed-income holdings.
The Tactical Balanced strategy sold its remaining 25% bond allocation to cash at the end of April. The fixed-income model identified a change in the trend as the yield on the 10-year Treasury rose to 3%. While one of the equity models is close to signaling a sell, it hasn't yet, leaving the portfolio evenly split between U.S. stocks and cash.
After sitting on the sidelines in cash for two months, the Tactical High Incomemodel re-entered the high-yield market in mid-April. The rise in high-yield bond prices coincided with a rally in oil prices and the breakout was identified by the model and the portfolios were invested across a diverse basket of high-yield funds and ETFs.
Tactical Opportunity entered the month positioned very conservatively with 80% of its portfolio in cash, but ramped up stock exposure as a few of the models identified opportunities. We also exchanged out of the industrials sector, a position that we held for almost 1½ years, and into financials. At the end of the April, the portfolio was 80% invested with only 20% in cash.
Tactical Sector Rotation traded into energy last month as oil and natural gas prices were on the rise. Semiconductors saw continued weakness; the sector is falling in our rankings. For quite some time, technology and semiconductors have dominated the ranks of the top holdings. Our model monitors the relative performance of different industrial sectors and will shift the portfolio to the sectors exhibiting the strongest risk/return characteristics when compared to the other sectors analyzed. At the end of the month, the model signaled one trade out of industrials and into health care.
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