Treasury yield curve steepens, spread to investment grade widens. The Treasury yield curve steepened over the past week despite recent data suggesting global economic activity, particularly in China, ticked lower. Instead, more dovish comments from Federal Reserve Chair Jerome Powell and other central bank officials amid the backdrop of a robust labor market, healthy wage growth, and moderate price inflation have helped to not only push longer-term rates higher, but also increase the spread between Treasuries and comparable maturity investment grade (IG) corporate debt. At current levels, we think IG valuations look attractive. Should Treasury yields continue to rise gradually while IG yields stay flat or contract, which we expect, IG returns should hold up relatively well.
Putting the good start in perspective. Today is the 10th trading day of 2019, with the S&P 500 Index up 3.0% for the year after 9 trading days. 2018 saw the S&P 500 up 4.2% on day 9 but it finished the year down 6.2%, so a good start to a year is by no means a perfect indicator for continued market strength. At the same time, historically we’ve seen good starts to a year produce solid returns. In fact, starting in 1950, when the S&P 500 was up 2.5% or more on the 5th day of the year (like 2019) the full year had been higher the previous 12 times in a row, with 2018 officially ending this streak. There are many other things that matter more for how stocks will perform during a year than how the first few days do, but it is worth noting this seemingly random indicator did have a nice record until last year.