MAC Monitor — June 7, 2021

Multi-Asset Class Risk Monitor | Week Ended June 4, 2021

  • Stocks and bonds continue to rise, as weaker job growth eases fears of overheating economy
  • Credit spreads unmoved by Fed announcement
  • Portfolio risk falls, but diversification remains limited

Stocks and bonds continue to rise, as weaker job growth eases fears of overheating economy

Stocks and bonds continued their joint ascent in the week ending June 4, 2021, as the STOXX® USA 900 and STOXX® Europe 600 blue-chip indices both climbed to record highs, despite slightly weaker-than-expected US job-market data. Non-farm payroll data, released on Friday, showed that the American economy had created 559,000 new jobs in May, short of the consensus forecast of 650,000. However, market participants appeared to interpret this as a sign that the US economy was not overheating as yet, thus taking pressure off the Federal Reserve and giving the central bank more leeway, before it may need to tighten its monetary policy once more.

Please refer to Figure 4 of the current Multi-Asset Class Risk Monitor (dated June 4, 2021) for further details.

Credit spreads unmoved by Fed announcement

Credit spreads continued to hover sideways in the week ending June 4, 2021, seemingly unmoved by an announcement from the Federal Reserve on Wednesday that it would start selling the corporate bonds and exchange-traded funds it acquired through its Secondary Market Corporate Credit Facility. When the central bank first declared its intent to support credit markets in March 2020, risk premia tightened significantly. But this public reassurance was apparently all that was needed to achieve the desired effect. The eventual purchases of just under $14bn (versus the original potential target of $750bn) had little actual effect on the market. So, it is hardly surprising that the announcement of the planned reversal had no noticeable impact either—and neither, probably, will the ultimate sales.

Please refer to Figure 5 of the current Multi-Asset Class Risk Monitor (dated June 4, 2021) for further details.

Portfolio risk falls, but diversification remains limited

Short-term risk in Qontigo’s global multi-asset class model portfolio fell 0.6% to 7.2% as of Friday, June 4, 2021, as standalone equity volatility declined by 1 percentage point to 10%, while most correlations remained unchanged. The interaction between stocks and bonds stayed firmly positive, as prices for both rose in tandem for the second week in a row. In fact, the two major asset classes have been moving in the same direction for 11 of the past 16 weeks, resulting in a return correlation of +0.5 for US equities against all fixed income assets in the portfolio. This, in turn, severely limited diversification opportunities, which came mostly from the decoupling of FX rates from other asset-class returns.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated June 4, 2021) for further details.