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Portfolio > Economy & Markets > Stocks

Stocks Rally in May — So Why Are Bonds Rising?

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Equity markets continued their upward climb in May. The only significant pullback occurred on the 17th, which saw the Dow lose 373 points due to obstruction of justice concerns surrounding President Donald Trump. Overall, the market lost 1.8% on the day, its worst one-day performance since September 2015. 

Even so, stocks found a way back, and the rally is increasing in its breadth, with emerging and developed market equities finally closing the performance gap that has plagued international markets for years. Meanwhile, the tech sector continues to be a pillar of strength for the overall market. And all this positive karma is linked to increased economic growth both home and abroad.

With all these good vibrations, it is something of a mystery that bond prices have resumed gaining ground. Fixed income guru Jeff Gundlach thinks that fixed income gains are due to expectations of lower inflation ahead, even as the Fed continues to raise rates. While that logic may be a contributor, another explanation is that investors have become increasingly nervous over the seemingly unstoppable equity market rally. While diversification is a great thing, it is difficult to see bonds as an effective shock absorber in a rising rate environment.

Bottom line: skittish stock investors should consider long volatility holdings such as option strategies or managed futures, as a more effective hedge if the Trump rally goes off the rails.

Check out more Searching for Alpha commentaries by Ben Warwick.

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