As the domestic equity market wrapped up one of its best second quarters ever, there is still a vast amount of uncertainty surrounding the markets ranging from COVID-19 to the presidential election. Nonetheless, broad market indices like the S&P 500 SPX and Nasdaq Composite NASD have performed extremely well recently, highlighted by the S&P 500 Index Funds 4.35 average group score. On the other hand, the All US Fixed Income Quality group has maintained a strong group score of 3.98 coupled with a positive score direction of 1.60. From a historical perspective, this is not the usual market paradigm, where both of these groups maintain scores above the 3.00 mark and rise together close the 4.00 score threshold. Going back to 2003, the only occurrence where both groups scored above 3.00 for a significant period of time was in 2012, although we can see on the image below that the groups were not moving in tandem for most of that period.

As we can see above, when All US Fixed Income Quality has a group score above 3.00, it is usually accompanied by the S&P 500 Index group dipping below the 3.00 line. Until recently, this relationship looked like it would hold true again, as the bond market began to cool off when the equity markets began to recover following the sell-off driven by COVID-19. However, since the beginning of June, the All US Fixed Income Quality group score jumped and followed its domestic equity counterpart towards the coveted 4.00 group score and into the “blue sky” zone. 

As surprising as it may seem given the strength of the technology sector, the iShares Barclays 20+ Year Treasury Bond ETF TLT has outperformed the Invesco QQQ Trust QQQ year-to-date on a total return basis. TLT possesses an optimal fund score of 4.16 along with a score direction of 1.16. Keep in mind the long duration associated with TLT allows it to capitalize on interest rates heading lower, but it is more volatile than the traditional bond fund shown by its rRisk of 0.73. Although tamer than TLT, the Fidelity Total Bond ETF FBND has an exceptional fund score of 5.24 with an rRisk of 0.20 and has bested the total return of the SPDR S&P 500 ETF Trust SPY.TR in terms of performance year-to-date.

While both groups doing well is not a knock on one or the other, it does present us with a cautionary sign. With their relationship in its current state, it is important to keep an eye on both and monitor for any changes going forward. At the moment, both the S&P 500 Index Funds and All US Fixed Income Quality groups possess strong group scores. Despite history demonstrating the likelihood that one group will eventually fall off as the other preserves its strength, it is important to be prepared for the scenario that both groups could continue to post strong group scores going forward as we move into the second half of the year. In either case, these two macro groups deserve consideration and attention, so your total asset allocation is in harmony with what the market is telling us.