Tactical investing news, views and resources for financial advisors
In Friday’s On My Radar, Steve links to a great interview of David Swensen, Yale’s CIO, by former Goldman co-chairman and former Treasury Secretary, Robert Rubin.
Take a few minutes and watch the interview. It’s worth it. Add Swensen to the list of famed investors predicting low single-digit forward returns. He shares some sage advice on portfolio management and diversification.
Click the photo for the full interview.
Take a look at the recession data in the next chart. Since 1930, there have been at least one or two recessions every decade. Three of the post-1930 decades had just one recession and five of the decades had two recessions. There have been zero recessions so far this current decade.
Will this be the first without recession? I doubt it very much. Often I share with you my favorite recession indicator signal charts. There is no current sign of recession within the next six months. I’ll keep you posted. Here are the recessions by decade chart:
Source: Crestmont Research
Let’s continue to keep our eye on leading recession indicators. The best is an inverted yield curve. The equity market is also a good leading indicator. No need to cover this today.
James Montier from GMO along with his colleague, Matt Kadnar, put out an excellent piece last week. They explained how GMO gets to the -4.2% annualized real return forecast for U.S. Large Cap stocks.
With everyone herding into passive index funds, James and Matt begin by addressing what you are probably hearing from your clients. “U.S. stocks have outperformed for the last number of years, so I see no reason why that should not continue.”
Yes, but not likely. Here is a look at their forward return estimates for various asset classes.
Click below to read more about GMO’s methodology and forward estimates for the S&P 500.
READ MOREThe 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:
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.
READ MOREFollowing 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.)
My favorite trend following indicator is something we co-created with Ned Davis Research. It looks at the underlying trends in 22 industry sectors and scores the weight of evidence on a 0 to 100 scale. Here is the chart if you haven’t seen it before (note: I post it every Wednesday afternoon in Trade Signals). The trend for equities is currently bullish.
What about bond exposure? We monitor the Zweig Bond Model.
Please refer to the March 10, 2017 post of On My Radar for an explanation of how it works.
Finally, I believe the key to investing and perhaps the most important lesson to learn is how money compounds over time. To that end, I wrote a piece called the “Merciless Mathematics of Loss.” Next is the chart and you can find the full piece here.
This week we offer several charts concerning inflation, interest rates, U.S. economic recoveries, equity market performance and equity mutual fund flows.
This chart plots U.S. economic recoveries. Note the blue line. Debt’s a major drag:
Source: Crestmont Research
Keep an eye on inflation (rising):
Year-over-year change in CPI – look at the January numbers in the far right of the chart. The most recent BLS – Bureau of Labor Statistics Annualized Inflation Rate year-over-year equals 2.5%. The Fed’s target has been reached:
Source: Advisor Perspectives
And if you were wondering what inflation looks like by category:
Source: dshort.com
Source: dshort.com
Here is the current probability of a Fed March interest rate hike:
Switching to equities, Ned Davis Research has something they call “Top Watch Indicators”… meaning indicators that help them spot a probable market top.
Here’s how you view the next chart:
Source: Ned Davis Research
Chalk one little dot up for the active fund managers. All the money has been flowing into passive index funds and ETFs:
And all that money that chased into “high dividend papers?” In a few short months, they’ve given up six years of excess returns. I continue to be cautious on high dividend stocks due to over popularity, low interest rates and the risk of rising rates.
Diversification has been under pressure the last few years. The average university endowment lost 1.90% in 2016. However, it is best viewed over the long term and designed to achieve a certain return relative to an acceptable amount of risk. 100% allocation to stocks is for a different investor risk profile. Not wise to compare one asset class to a diversified investment plan. With that said, in case you were wondering… this is how the 10 richest universities invested their money in 2016:
The number one rule many of us were taught is “Don’t Fight the Fed.” I like to add “trend” into that equation and, as you’ll see in the next chart, the math is compelling.
When the Fed raises rates (don’t fight them) and the trend turns negative, equities underperform. Focus on the red arrows. Two different time periods are measured, however, the message is the same. The big corrections come when both the Fed and trend turn negative. I wrote some time ago in On My Radar to “watch out for minus 2.” We currently sit at -1. I’ll share this chart from time to time – especially if -2 is triggered.
Here is how you read the chart:
Source: Ned Davis Research
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.)
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.
MORE