The month of June was unkind to both bonds and stocks, as both lost value during the month. From the beginning of May until last week, Barclays index, which tracks investment grade bonds, was down 3.77%. Some people are referring to this as a “blood bath”, which it certainly is not.
Back in 1994, we had what has come to be known as the “bond massacre” when bond values dropped 5.3%. Bonds, like stocks, do go up and down, but bonds pay interest, which helps offset losses. The reason for owning bonds is that, over the long-term, they are more stable and can offset significant losses in stocks. The portion of the bond market that was most adversely impacted was United States government notes with maturities of 10 years or longer. These bonds were down an average of 10.8% during that same period. The long-term investor knows that a knee-jerk reaction is not the best investment move. As occurs quite often with a big selloff, the pendulum swung back, with bond interest rates falling later in the month and the value of bonds beginning to grow, although not back to where they had been at the beginning of May.
While it is unusual, stocks and bonds can rise or fall at the same time. Such was the case in June as stocks also fell. Using the S&P 500 as our measurement, the index fell from 1666 on May 21st to 1573 on June 24th, a drop of 5.6%. It recovered to 1606 by the close of the stock market on June 28th. In many respects, the second quarter of the year returned the gains of the first quarter. What precipitated this selloff of both bonds and stocks was an assessment by the Federal Reserve Board that the economy was getting stronger and would be growing significantly in 2014 and 2015. In May, I indicated that I thought the market was ready for a 10% correction but not a bear market. Some bonds have produced that correction, as have some stocks. The long-term outlook seems bright.
Ed
