Continued Positive Markets and Lower Volatility in April
After very strong returns in stock markets around the world during March, April may have seemed lackluster. Yet, in a historical context, it was another solid month. Although the month ended on a sour note, with stocks falling due to surprises from the Bank of Japan and late news on U.S. economic growth, stocks did end up positive for the month. Once again, international stocks led the way. Last month international emerging markets set the pace, whereas this month it was international developed markets. The MSCI EAFE Index, an index of developed-market stocks, posted a 2.9% gain for the month. U.S. stocks lagged somewhat but did see positive returns, despite disappointing earnings reports from major technology firms, with a few exceptions, notably Facebook. Bond prices were up slightly, as gauged by the Barclays U.S. Aggregate index.
Continuing the welcome trend that started last month, stock-market volatility was more subdued than the early months of 2016. In the thirty-nine trading days of January and February, the S&P 500 (an index of Large-Cap U.S. stocks) moved by more than 1% on twenty-three days. In March, this fell to only three days over the month. In April, there were again only three days.
What drove these returns? First, central banks around the world have continued to maintain low (in some cases negative) short-term interest rates and to signal that any increases in rates will be gradual. This removed one potential fear in stock markets and made for a quiet month in bonds. However, at the end of the month the market was surprised by the Bank of Japan’s decision not to employ additional stimulus measures for the time being. Second, the economic news was mostly—though not universally—positive. In the United States new claims for unemployment insurance continue at historically low levels. But there was news late in the month of disappointing economic growth. In China, there has been more positive news of late, in contrast to gloomier news early in the year. Growth in industrial production picked up, with increased output from high-tech and manufacturing industries; however, the long term economic outlook still remains somewhat uncertain. Third, oil prices rose sharply in April, with crude prices up roughly 18%). In recent months we’ve seen an apparent link between oil prices and equity markets.
What it Means for You
At Financial Engines, we believe in the importance of a diversified portfolio with risk appropriate for your individual circumstances and preferences. Being diversified isn’t about having lots of funds in your portfolio; it is about being exposed to various sources of risk and return—investments that are unlikely to behave in the same way at the same time. Over the long term, this offers the best way to achieve growth in your portfolio without excessive risk. International stocks are an important part of a diversified portfolio because some of the forces that drive them are different from those driving U.S. stocks. In recent years, we’ve seen U.S. stocks do better than international ones. However, over the past two months, international stocks are the ones that have outperformed. It’s important to be exposed to both.
Talk to an advisor if you are uncertain about the level of risk in your portfolio.
Below are some typical allocations for investors planning to retire in 2020, 2030, or 2040. Please note that, because we tailor advice to your specific plan and circumstances, your portfolio will not precisely match these allocations.
In April, portfolios that held higher allocations in equities, both International and Domestic, would see stronger performance in their accounts–as riskier assets were positive for the month. Typically, these would be portfolios with longer time horizons, or those with more aggressive risk preferences. However, even those portfolios with a shorter time horizon on the growth objective would see positive performance as we do hold a good portion of those accounts in equities. It is important to note, even in the portfolios that are the most aggressive, we still maintain an allocation to bonds in order to diversify the overall exposures of the portfolio.
Discover your Money Profile
Financial Engines applauds the U.S. Department of Labor’s new Conflict of Interest Rule