March was generally kind to risk exposures. The main exceptions were commodities overall, foreign government bonds in developed markets and investment-grade U.S. bonds. But the slippage in that trio was more than offset elsewhere in the capital markets. As a result, our passive benchmark of the major asset classes—the Global Market Index (GMI)—rose by handsome 3.4% last month. That’s the highest monthly performance since last September’s 3.5% gain.

For the year so far through the end of March, GMI is ahead by 2.3%. That’s a respectable performance for a passive benchmark that owns everything and shuns preconceived notions other than setting asset allocation to relative market values and letting the ebb and flow of prices run their course. As such, it’s a worthy benchmark for considering the full boat of investment choices.
By comparison, the universe of actively managed balanced mutual funds in this year’s first quarter rose by 2.1% (world allocation funds) to as much as 4.4% (target date 2041-2045 funds), according to Morningstar.
As for the lagging asset classes in this year’s first quarter, there are two: commodities and foreign developed-market government bonds. Some of the blame is the rebound in the U.S. greenback in 2010’s first three months. The U.S. Dollar Index jumped 4.1% this year through the end of last month. Commodities and foreign bonds denominated in local currencies are sensitive to the meanderings of the buck, and so it’s no surprise that that those two corners of the markets have been weak this year.
Otherwise, what’s driving the price of risk higher? A bullish outlook on the U.S. economy is arguably at the top of the list. We’ve come a long way since late-2008/early 2009. But there’s one rather large fly in this ointment: the labor market. As we’ve been discussing for some time, the employment numbers have yet to offer convincing evidence that net job creation on a sustainable basis is imminent.
Will tomorrow’s update on payrolls for March from the Labor Department tell us different? Or, to put it in investment terms, will tomorrow’s report on jobs validate the rally in risk so far this year? Tune in tomorrow morning for the answer…