With 2 full months of the year completed, the S&P 500 (SPY) is up +1.38% while the Barclay’s Aggregate is +2.76% YTD, leaving a 60% / 40% balanced portfolio up +1.93% YTD as of February 28, 2025.
In the bond market, “duration over credit” has been the theme, since – despite stagflation fears – the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is up +6.21% YTD, while the iShares High-Yield Credit ETF is +2.34%. High-yield credit spreads, as well as high-grade credit spreads widened a little bit last week, but the spread-widening is not yet worrisome.
The important thing for readers and investors is that investment-grade bond funds, which are more duration-sensitive than credit-sensitive at this point in the cycle, as well as Treasuries, are outperforming high-yield and lower-rated credit funds and asset classes.
The Treasury yield curve is now slightly inverted, with fed funds at 4.375%, while the 10-year Treasury yield closed Friday, February 28th at 4.23%. Given how longer-dated Treasury yields have avoided moving higher with higher inflation fears, that tells me (or rather us) that significant yield curve steepening will likely have to occur by fed funds being lowered rather than longer-maturity yields moving higher.
The Fed Governors have been adamant that the current fed funds rate remains “well above neutral”.
The 2nd surprise this year is that watching the various equity asset class returns, value is now handily outperforming growth.
Through February ’25, here’s some YTD returns of Mag 7:
- Nvidia (NASDAQ:NVDA): -6.98%
- Apple (NASDAQ:AAPL): -3.33%
- Microsoft (NASDAQ:MSFT): -5.62%
- Amazon (NASDAQ:AMZN): -3.24%
- META (NASDAQ:META): +14.12%
- Google (NASDAQ:GOOGL): -10.05%
- Tesla (NASDAQ:TSLA): -27.45%
Personally, I track two mutual funds to gauge the “value vs growth” trade, i.e. American Capital’s Growth fund vs Oakmark’s Value Fund managed by Bill Nygren and team. American Capital’s Growth (GFAFX) was up 1.21% YTD, while the Oakmark Fund had risen +4.61% YTD. The Oakmark Fund now has an ETF and it has risen +7.49% YTD.
As the Mag 7 and notable growth names falter, “value” is filling the breech.
Two stylistic ETF’s that show the comparison are the S&P 500 SPDR Portfolio Growth (NYSE:SPYG), which had fallen -0.35% YTD, while the S&P 500 SPDR Portfolio Value (NYSE:SPYV) had risen +3.32% YTD as of month-end February ’25.
Finally, China had a tough week last week, probably thanks to renewed tariff talk by the President. He’s not going to take his foot off the gas very much (or so it seems) on this issue.
Europe continues to perform well: the VGK (Vanguard Europe ETF) is up +10.46% YTD, this blog’s biggest international position, which is predominantly European-centric right now is the JP Morgan Developed Int’l Value (JFEAX) has risen +10.03% YTD, even though “emerging markets” remain flat. The Emerging Markets Ex-China ETF is down -1.57% YTD.
Conclusion
The two consecutive 25% returns for the S&P 500 benchmark in 2023 and 2024 had many people still pretty bullish coming into the year, even though the only period where investors had seen 3 consecutive year of +20% returns, was the late 1990’s or the period from 1995 – 1999.
So if the S&P 500 is only up 5% – 10% this year, that might present the opportunity for long-dormant asset classes like international, like value, etc. to generate benchmark-beating returns.
There is so much uncertainty around tariffs, DOGE, Ukraine, the tension is almost palpable, but that also present opportunity.
Friday, March 7th’s jobs report is still looking for 140,000 – 150,000 “net new jobs created” by the US economy, with Briefing.com expecting +150,000 overall, and the private sector expecting +140,000.
The 10-year Treasury yield is telling us something, and while some say it’s a recession warning, high-yield credit spreads remain pretty well bid.
For a client meeting last weekend, I wrote down the last 5 calendar year’s Barclay’s Aggregate (AGG) return:
- 2020: +5.18%
- 2021: -1.54%
- 2022: -14.35%
- 2023: -3.32%
- 2024: +2.92%
The 5-year annualized total return for the iShares Core U.S. Aggregate Bond ETF (NYSE:AGG) as of 12/31/24 was -0.52%, while the 10-year annualized total return is just 1.45%.
The AGG’s modified duration is 5.9 years so you get a little boost from the benchmark itself, while the duration for the TLT is 18 years.
2025 may be the year where duration becomes fashionable again.
Disclaimer: None of this is advice or a recommendation, but only an opinion. Past performance is no guarantee of future results. Investing can and does involve the loss of principal even for short periods of time. None of this information above may be updated, and if updated may not be done so in a timely fashion. All return data is sourced from Morningstar.