As we observe events in realms such as financial markets, politics, or weather, we tend to form beliefs — be they explicit or implicit beliefs — about cause and effect, or whether the events were positive or negative, good or bad. Science has formalized this process: testing a hypothesis with empirical data. One of the tradeoffs when evaluating beliefs in light of evidence, or a hypothesis in light of data, is the type of error we would prefer if our beliefs turn out to be wrong. In the investment realm, this bias can affect our beliefs and behaviors, such as our tolerance for risk and our allocation choices. Several examples will help illustrate this point.
To say that value is difficult to find in the global equity markets would be an understatement. In fact, when we look at all 44 of the developed market regions and regoin/sectors, what we find is that in only ten of them is the median company trading at a discount to its own 10-year average multiple.
With the USD now about 5% off its January peak and having made a series of four lower lows and lower highs, it’s fair to say that the period of US dollar strength we witnessed for most of 2016 has come and gone.
From the middle of April through yesterday 10-year treasury rates rose from 2.17 to 2.40, prompting the obvious question of how high will they rise. The interesting thing about the recent slight backup in rates is that it has occurred within the context of slowing economic data.
Since the beginning of 2017, the US dollar has struggled against nearly every major currency, calling into question the idea that the US dollar is still in a bull market. Indeed, since the dollar made its cyclical high on the first day of 2017 trading,
As investors, it’s easy to get caught up in headlines about things like Snap’s $23bn market cap or Tesla overtaking Ford and GM to become the most valuable US auto maker.
After testing and bouncing off the important 2.32% level four times so far in 2017, the US 10-year bond finally broke below that important threshold. The phenomenon has gone basically unnoticed by the financial commentators, but it occurs just as US economic data begins to wane following the bounce that started in the second half of 2016.
It was shaping up to be a pretty good day for stocks until the Fed minutes dropped the balance sheet hammer on the markets this afternoon. In the minutes detailing the discussion at the March meeting, Fed officials suggested they might begin draining the balance sheet later this year.
As 1Q17 finishes with a gain in the books, the stock to bond performance ratio has also broken to a new cycle high, elevating to levels not seen since mid-2007.
With the dissolution of health care legislation barely final, murmurers out of Washington seem to suggest tax reform/cuts and infrastructure may be tackled in tandem in a way that attracts bipartisan support.