CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

What does the latest Fed rate increase mean for stocks?

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The Fed raised rates last week and bond yields sank lower.  Many expected the opposite reaction.  If you missed last summer’s mortgage refi opportunity, I believe you are going to get another chance.  Interest rates appear to be heading back down towards their July 2016 lows.

And what are the implications of Fed policy on the U.S. stock market?  Ned Davis Research’s Ed Clissold pointed out in a tweet late yesterday, “Today’s #FOMC decision is a reminder that even slow tightening cycles eventually impact the stock market. #fed @NDR_Research.”

The chart Ed shared in his tweet follows.  Here is how to read it:

  • NDR compares market gains during slow tightening cycles (black line in chart) vs. fast tightening cycles (red line in chart) vs. non tightening cycles (green line in chart), and more.
  • It looks at what happened historically to the stock market in periods when the Fed was quickly raising rates vs. slowly raising rates – like the current cycle.
  • The purple line is the current Fed tightening cycle that began in December 2015.
  • Note how NDR breaks out % Gain During 1st Year and % Gain During 2nd Year. We now find ourselves in year 2.  Purple line (right-hand side of chart).
    • Year 1 gains averaged 10.8%
    • Year 2 gains averaged -1.8%
  • The green line shows non-cycles… markets do better when the Fed is lowering (easing), not raising (tightening), interest rates. “Don’t fight the Fed” as they say.

Animal Spirits and the “Fear Gauge”

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In Friday’s On My Radar, Steve Blumenthal wrote, “Last Monday, the VIX broke below 10 to close at 9.77, the lowest level in more than a decade.  There are only three other days the index has closed at lower levels, all of them in December 1993.  Investors are complacent to risk.  They shouldn’t be.”

Investment consulting firm 720Global also recently wrote about market volatility in The Unseen, “Volatility: A Misleading Measure of Risk.”

As investors, we are negligent if we follow the Fed’s lead into this complacent stupor. By prodding economic growth with unproductive debt and reigniting asset bubbles, the central banks have simply done more of what created the spasms of 2008 in the first place. Despite the markets calm façade and historically low perception of risk, the vast chasm that lies between perceived risk and reality is troublesome.

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Beware: Rising Rate Environment

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Reminder for bond investors: When interest rates rise, bonds lose value.  I shared the following chart in July 2016 (interestingly just two days from the 1.37% low in yields).  It shows how much money is lost for every 1% increase in rates.  The top section is the 10-year Treasury bond and the bottom section is the 30-year Treasury.  (I know I’ve shared this chart with you several times, but I believe it is worth revisiting.  I just don’t believe the average investor knows just how much risk they are taking on with their so called “safe” investments.)

0217-01

1.37% was the low yield back on July 13, 2016. The 10-year Treasury is currently yielding 2.42% and the 30-year is yielding 3.02%.  That adds up to a -8.84% loss in value for the 10-year and call it a -16% for the 30-year.  Maybe rates move back down, but I’m not so sure.  I’m a bit more worried about what those losses will look like when yields rise to 3.4%, 4.4% and 5.4% (similar to where they were in 2007).  -30% is a real risk.

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Best Ideas (Part II) from the Morningstar ETF Conference

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ms-etf-conferenceOn September 8, Steve Blumenthal appeared on a panel regarding portfolio construction (“Beyond the 60/40 Portfolio”) at the Morningstar ETF Conference in Chicago.

One of Steve’s favorite sessions was the “Best Ideas” panel, which featured Mark Yusko of Morgan Creek Capital Management, John West of Research Affiliates, and Rich Bernstein of RBA.  Steve shared Part I of his notes from the Best Ideas panel in the September 16, 2016 edition of On My Radar.

Steve shared Part II of his notes in Friday’s On My Radar.  Read on!

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Best Ideas from the Morningstar ETF Conference

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ms-etf-conferenceOn September 8, I had the privilege of participating on a panel regarding portfolio construction (“Beyond the 60/40 Portfolio”) at the Morningstar ETF Conference in Chicago.  Not surprisingly, there were a lot of terrific discussions, and I took tons of detailed notes.  One of my favorite sessions was the “Best Ideas” panel, which featured Mark Yusko of Morgan Creek Capital Management, John West of Research Affiliates, and Rich Bernstein of RBA.  Morningstar’s Jeff Ptak did a great job moderating the panel.

As promised, I shared some of my notes from the Best Ideas panel in Friday’s On My Radar.  More to come from the conference later this week.  Stay tuned!

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Trade Signals – Sentiment Better, Risk On Remains

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With a nod towards broad portfolio diversification, following is a quick summary of what I am seeing this week — organized by investment category (equity markets, fixed income and liquid alternatives):

Equity Markets: Investor Sentiment moved from excessive optimism to neutral.  The trend remains positive.  Supply and demand continues to evidence more buyers than sellers (a bullish signal).  Don’t Fight the Tape or the Fed moved from 0 to -1.  This next chart shows us why we want to watch out for -2 (an unfavorable trend and unfriendly Fed environment):

09.07.01

The 13/34-Week EMA trend indicator remains bullish.  The CMG NDR Large Cap Momentum Index is nearing a buy signal; its model trend line is bullish.

A quick note on the chart above:  NDR shows price appreciation and not total return.  So, the Buy/Hold + 8.55% Gain/Annum would be higher with dividends added in.  That would be more informative; however, since we are comparing the price appreciation in each zone (+2, +1, Neutral (0) as reflected), I believe the data is telling and useful in giving us a sense for which environments suggest more or less risk.  Actual returns in each category are higher.  A thank you to an astute reader.

Fixed Income: The 10-year Treasury Yield is back down to 1.52%.  Money is voting with its pocket… saying the Fed won’t raise rates.  The Zweig Bond Model remains bullish on bonds and our HY remains in a buy signal.  The underlying HY fundamentals are terrible; however, this is another good example where trend following can be a good friend.  We will ride the uptrend until it reverses.  Further, we see “JNK” and “PCY” exhibiting the strongest relative strength in fixed income (this from a universe of nine ETFs ranging from short-term and long-term Treasury bonds, corporate bonds, munis, high yield, emerging market, inflation and developed market bonds).

Liquid Alternatives: The CMG Opportunistic All Asset ETF Strategy is currently allocated approximately 81% to equities and 19% to fixed income.  We are seeing strong relative price leadership in “EEM” (Emerging Markets), “VT” (Vanguard Total World Stock ETF), “QQQ” and “IYW” (Technology ETFs) and “IYF” (U.S. Financials).  Our two fixed income ETFs, “EDV” (Vanguard Extended Duration Treasury) and “TLT” (iShares 20+ Year Treasury Bond), have rallied nicely.  Biotech looks to be recovering from the Hillary Clinton statements.  For weightings by asset class, please see the CMG Opportunistic All Asset Strategy pie chart below.  Gold (“GLD”) looks to have held support at 125.  The cyclical trend for gold remains higher as evidenced by the Gold chart you’ll find in the full post (link below).

For charts, analysis, and commentary see the rest of the story in Trade Signals — Sentiment Better, Risk On Remains.

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change.  They do not represent the opinions of CMG.  CMG’s trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts.  Steve’s opinions and forecasts may not actually come to pass.  Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.

Blumenthal On Shiller

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(left ) Brianna Blumenthal, Professor Robert Robert Shiller, Steve Blumenthal at Annual Global ETF Awards dinner

(left ) Brianna Blumenthal, Professor Robert Shiller, Steve Blumenthal at Annual Global ETF Awards dinner

Last Thursday I met The Yale University Sterling Professor Economics Robert Shiller at the 12th Annual Global ETF Awards dinner (Shiller is recipient of the 2013 Nobel Prize in Economics).  I told him how I used his data in my research paper.  I ranked his historical month end CAPE (or Cyclically Adjusted Price Earnings) into five categories that ranged from least expensive to most expensive and then looked at what the subsequent 10-year returns turned out to be for each category.

Not surprisingly, the returns were best when valuations were most attractive (lowest CAPE) and risk too was less as measured by average and maximum drawdown.  The performance figures were somewhat similar to our median P/E calculations.

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Hedging Your Equity Exposure

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Steve Blumenthal, CMG Capital Management Group, on hedging your equity exposure

Steve Blumenthal, CEO, CMG Capital Management Group

I continue to favor 30% Equities (hedged), 30% Fixed Income and 40% Alternative (defined as anything other than traditional buy-and-hold).  Find complimentary (low-correlating) ETFs, funds and strategies to build your alternative bucket just as you’d diversify your equity and fixed income allocations.

One of the great advantages advisors and individuals have over large endowments and pensions is the ability to source liquidity quickly.  One of the great disadvantages is that many individuals are unable to gain access to exceptional hedge fund managers or private equity funds.  Though you can get close enough.

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