Economists expected today's jobs number to come in around 240,000. However we saw a significant upside surprise with 295,000 new payrolls posting. This is yet another sign of the U.S. economy being on a sustained upward trajectory and has reinvigorated projections of a June fed-funds rate hike. This thought spooked both the equity and bond markets. According to CME, on Thursday, investors saw the likelihood of a June rate increase at 16%. After this morning's report, that number jumped to 21%. Moving out to September, the rate increase likelihood percentages jumped from 51% to 64%.
Today's events bring about an interesting discussion on portfolio positioning in the anticipation of rising rates, a volatile bond market and the attractiveness of cash in such instances. Ben Carlson, author of the very useful A Wealth of Common Sense blog, posted a piece yesterday that turned out to be very timely. The topic was whether bonds could serve as a purposeful portfolio diversifier even when yields begin to emerge from this low rate environment. He acknowledged there were many opinions and viewpoints to be observed.
However, at the heart of his post was a comparison of two portfolios, one that held 75/25 stock/cash versus 60/40 stock/bonds in the other. (*The 60/40 portfolio is comprised of 60% in the S&P 500 and 40% in bonds utilizing 10 year treasuries through 1975 and the Barclays Aggregate Bond Index thereafter. The 75/25 portfolio is made up of 75% in the S&P 500 and 25% in short-term t-bills). The results by decade are below:
The 75/25 portfolio has offered slightly higher historical returns with increased volatility. We'll let the rest of points made in Ben's post speak for themselves but we're glad he introduced the debate.
As for our take on bonds vs. cash in a rising rate environment, we'd side toward saying the solution lies somewhere in between as opposed to the all or none scenario. This is a topic that is sure to play an important role in diversified portfolios in the months and years ahead.
