It’s not just stocks: bonds and commodities are up this year as well. Russ discusses whether than can continue.

Suddenly 2018 is looking like a bad dream. Financial markets have been magically transported back to the halcyon days of early 2017 when stocks, bonds and just about everything else rose in peaceful unison (see Chart 1).

Asset performance- YTD

That stocks have had a spectacular start to the year is well known. What is less remarked on is how well defensive assets have performed: Gold is up approximately 2.5%, and a broad index of U.S. bonds is up about 1%.

The respectable performance of U.S. bonds, particularly when viewed in the light of a surging stock market, is a bit odd. U.S Treasury 10-year yields bottomed on January 3rd at 2.55%. While interest rates have backed up since then, the increase has been negligible. Other bond markets have behaved in a similar fashion. German Bund yields have fallen to 0.10%, the lowest since the fall of 2016. Stubbornly low yields are starting to look out of place against an increasingly “risk-on” market. Consider the following:

1. S. economic data has been decent.

While the global economy is slowing, U.S. economic data has been stable, bordering on respectable. The economy produced over 300,000 new jobs in January. At the same time, manufacturing gauges rebounded, although they remain well below the level of a year ago.

2. There’s less need for a hedge.

To the extent investors rely on bonds as a hedge against equity and economic risk, there has been less need to hedge. The S&P 500 has gained 8%, the NASDAQ around 10% and crude oil around 16%.

3. Cyclicals are beating defensives.