SIA weekly: Asset class rankings currently favour bonds
For this week's SIA Equity Leaders Weekly, we are going to look deeper into the recent comparison change between U.S. Equity and Bonds within our Asset Class Rankings. Also, we will take a closer look at an intermediate-term bond for further analysis into the bond market.
S&P 500 Index vs. iShares Core U.S. Aggregate Bond ETF (SPX.I vs. AGG)
With some the recent change in the asset class rankings with Bonds moving above U.S. Equity, we wanted to take a closer look at this relationship through a relative strength comparison chart. In this chart, every X represents a 2% outperformance of U.S. Equity (SPX.I) over the iShares U.S. Aggregate Bond ETF (AGG). Every O represents a 2% outperformance in favor of U.S. Bonds over U.S. Equity. The VS SMAX score in the top right hand corner of a comparison chart also will tell us who is currently winning this relative strength battle against each other. A score from 6 to 10 tells us that the first symbol entered in this comparison, U.S. Equity, would be winning with a score from 0 to 4 telling us that the second symbol entered is winning this comparison, in this case U.S. Agg. Bonds (a score of 5 would be a tie in this case).
Looking closer at this chart, we can see some significant time periods where this relationship has been in favor of one asset class over the other long periods of time in some cases multiple years. For U.S. Equity, it was in an uptrend on this chart from 2004-2007, mid-2009 to mid-2011, and from 2012 to mid-2015. U.S. Bonds have been outperforming over U.S. Equity shown as a downtrend in this chart from 2008 to mid-2009, mid 2011 to end of 2011, and from last month to now it looks to be starting a new downwards trend. Although, this change in direction is brief at the moment, it will be important to keep a close eye on this relationship to see if this trend continues in this current direction or reverses quickly like it did in 2010.
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iShares 7-10 Year Treasury Bond ETF (IEF)
It is believed by many that at some point this year, the Fed will raise their interest rates, although nothing is certain until the announcement. The Fed hasnât had an interest rate increase since 2006 marking a long period of decreases and unprecedented low rates. SIA is not in the business of speculating when exactly this will happen, but does realize the value of the impact this may have on interest rates and different maturity bonds. Yields on long-term bonds may be more influenced by the growth and inflation outlook. Short-term treasury debt is seen by many as more vulnerable as its yields are highly sensitive to the changing in the Fedâs interest rate policy outlook.
Taking a look at an intermediate bond that has less interest rate risk than short-term bonds and less inflation risk than long-term bonds, the iShares 7-10 Year Treasury Bond ETF (IEF) seeks to track the investment results of bonds maturing between 7-10 years. This ETF seen on the chart has had a steady rise in an upward trend line for the most part but has had 7 pull-backs of 6% or more throughout, most recently in 2013. Currently, IEF is looking to rechallenge its prior high from February at the resistance level at $110.13. To the downside, support can be found at $102.72 and around $100.
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