We have created an adaptive regime-based investment framework that generates multi-asset and equity-sector-rotation model portfolios. The investment objective of these model portfolios is to combine downside protection with upside participation. Many firms say they do this – but our process integrates macroeconomic and financial cycle risk.
Last week, the S&P 500 price/revenue ratio reached the highest level in history, outside of the single week of March 24, 2000 that represented the peak of the tech bubble.
I am concerned that another major crisis will ensue by the end of 2018 – though it is possible that a salutary combination of events, aided by complacency, could let us muddle through for another few years. But there is another recession in our future (there is always another recession), and it’s going to be at least as bad as the last one was, in terms of the global pain it causes.
In this month’s Global Economic Perspective, Franklin Templeton Fixed Income Group dives into diverging central bank policy and weighs in on whether the European Central Bank is likely to be less accommodative—and what its timing might look like.
I have lived through recessions and bear markets; I know what they look like. I wish I could forget what they feel like. They don’t come out of nowhere; there are always warning signs. Many investors choose to ignore those signs; I choose not to. I hope you make the same choice.
We suspect that the Fed has already lost substantial credibility, but that investors prefer to look the other way as long as financial-asset values remain intact. It is, in our opinion, an “everybody knows the dice are loaded” situation that could portend an even sharper, impossible-to-escape downdraft once confidence is dislodged.
We see a strong case for convertible securities at this point in the market cycle along with our expectations going forward.
“It is a Riddle, Wrapped in a Mystery, Inside an Enigma: but Perhaps There is a Key” - Winston Churchill
What’s often missed in the “low interest rates justify higher valuations” argument is that this proposition assumes that future cash flows and growth rates are held constant.
I will illustrate how a regime-based framework can protect capital when markets deteriorate, while adding value when conditions improve.