The global asset allocation team reaffirmed their recommendation to modestly overweight equities versus bonds, despite the slight underperformance of equities relative to bonds so far this year. The S&P 500 is up about 3.5% while the Barclay’s aggregate index is up 4.0% and longer dated bonds are up over 13%. This strong bond market performance is contrary to consensus expectations which had forecast yields to rise above 3.5% this year. With the 10 year U.S. Treasury currently yielding below 2.5%, investors may be questioning the accelerating global growth expectations established at the start of the year. First quarter GDP was in fact disappointingly weak at negative 1.0%.
Our proprietary model shows U.S. economic growth, although still positive, in a slowdown phase. A review of historical asset class performance in this phase indicates that equities continue to outperform bonds as long as growth remains positive. The first quarter was indeed a disappointment on the growth front, but we are beginning to see signs of improvement in the second quarter. Areas of stability include improvement in payroll data and stabilization in consumption trends on slight improvement in wage growth. Overall, the broad range of U.S. data continues to suggest a rebound in the second quarter. We expect equities to outperform bonds in this environment.
The asset allocation team also continues to recommend an overweight position in developed international markets. However, we have downgraded UK on valuation concerns and deteriorating monetary conditions. We remain neutral overall emerging market equities but have upgraded emerging Asia. Although