CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

Archives for May 2017

Dalio: The near term looks good, longer term looks scary

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In Friday’s On My Radar, Steve features Ray Dalio’s recent LinkedIn post on the condition of the global economy.  Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world.  In sum, according to Dalio:

The near term looks good, but the longer term looks scary.  That is because:

The economy is now at or near its best, and we see no major economic risks on the horizon for the next year or two.

  1. There are significant long-term problems (e.g., high debt and non-debt obligations, limited abilities by central banks to stimulate, etc.) that are likely to create a squeeze,
  2. Social and political conflicts are near their worst for the last number of decades, and
  3. Conflicts get worse when economies worsen.

So while we have no near-term economic worries for the economy as a whole, we worry about what these conflicts will become like when the economy has its next downturn.

Steve suggests that advisors show Dalio’s piece to their clients.  Further, Steve says that advisors should tell clients to be careful and not to buy into the long-term buy-and-hold passive investment trap.  For more, click below to read On My Radar.

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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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“Risk On” — U.S. Equity Market Capital Flows

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Notwithstanding historically high market valuations, market flows continue into U.S. equities, specifically (see the chart below) into Large Caps and Total Market.

In certain strategies, we remain “risk on” with an allocation to equities, however you have to find something that works for you.  Something that you can have full conviction in… then stick to your process.  For your core portfolio allocations, you could diversify to several global ETF trading strategies.

Broad diversification is key.  On the other side of the next recession is the next great equity market opportunity.  It is not today.

Read more in this week’s On My Radar.

ON MY RADAR

Market Valuation & Forward Returns Update

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In the May 5th issue of On My Radar, Steve Blumenthal provides his popular survey of current market valuation and 10-year forward returns forecast.

First, Steve offers a quick primer on valuation and price-to-earnings (P/E) in layman’s terms.  Most investors (and even some financial advisors) don’t understand valuation methodologies and how median P/E works and what it tells us.

Steve presents a number of informative charts that advisors can use in their own valuation work and to discuss valuation and forward returns with their clients.

In sum, the broad market (i.e., S&P 500) remains very expensive and overvalued according to several metrics and 10-year forward returns are likely to be muted (0%-3% before inflation).  Steve says, “We clearly find ourselves today in a high valuation and low potential forward return environment.”  Click below to access the charts and Steve’s analysis!

ON MY RADAR

Fed Leaves Interest Rates Unchanged; Expresses Confidence in Economy

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Following a two-day meeting of the policy-making Federal Open Market Committee (FOMC), the Federal Reserve held current interest rates steady, but the central bank is likely to raise rates in the coming months (possibly in mid-June).  Fed officials are not worried about the slow pace of growth during the first quarter of 2017.  (U.S. GDP grew at an annualized rate of 0.7 percent.)  The Fed said the slowdown was “likely to be transitory.”

“Inflation measured on a 12-month basis recently has been running close to the committee’s 2 percent longer-run objective,” the Fed said.  Household spending rose “only modestly” but the fundamentals underpinning consumption growth “remained solid.”

Declines in the unemployment rate has been the primary driver behind the Fed’s recent rate increases.  The unemployment rate fell to 4.5 percent in March, the lowest level since 2007.  (The Labor Department will release the April jobs report on Friday.)