We think there are ample catalysts for ongoing corporate earnings growth. Growth appears to be broadening to more cyclical parts of the economy, such as manufacturing, as well as outside the U.S. The political climate – including the outcome of the remaining elections across Europe and President Donald Trump’s political agenda – is evolving. We think it will be difficult to predict Trump’s next move, but think tax reform is likely to remain on the agenda this year.
The financial markets continued to absorb major news events with surprising ease last week. Be it the tragedies in the U.K., the withdrawal from the Paris climate agreement, or the weakness in Friday's employment data, the stock and bond markets both continued to edge higher. Investors seem to have become conditioned toward individual isolated disappointments all while the bigger picture is toward one of global economic growth and relative stability.
My firm, AthenaInvest, has conducted extensive research on the use of behavioral factors to estimate expected returns and, in turn, to make market-rotation and beta-exposure investment decisions. The following article outlines our behavioral approach and compares the results to a passive benchmark.
Who is better at value investing: robots or people? How have robots – the quantitatively-driven passive funds that hold, for example, low price-to-book stocks – fared against actively managed value mutual funds?
Overall, my impression remains that the market is in the process of tracing out the blowoff finale of the third speculative financial bubble since 2000. Still, as is true for the market cycle as a whole, the broad outline of this top formation is likely to be shaped by three factors: 1) valuations, which primarily affect total market returns over a 10-12 year horizon, as well as the magnitude of potential losses over the completion of the market cycle; 2) the uniformity or divergence of market internals across a broad range of stocks and security-types, which remains the most reliable measure we’ve identified of the psychological preference of investors toward speculation or risk-aversion (when investors are inclined to speculate, they tend to be indiscriminate about it); and 3) overextended market action highlighting extremes of speculation or fear - in the advancing portion of the market cycle, these are best identified by syndromes of overvalued, overbought, overbullish conditions.
The macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely. That said, housing starts grew only 1% in the past year. Permits are up only 2%. Moreover, employment growth has been decelerating, from over 2% last year to 1.6% now. It's not alarming but it is noteworthy that expansions weaken before they end, and slowing employment growth is a sign of some weakening. Finally, real retail sales excluding gas is in a decelerating trend. In April, growth was just 1.6% after having grown at more than 4% in 2015. Personal consumption accounts for about 70% of GDP so weakening retail sales bears watching closely.
There is no question that Asians are following the political developments in the United States closely, because America is a critical factor in the economies of the region. I was asked almost everywhere whether Trump would be impeached and I told questioners it was unlikely.
Seniors and their families approach this milestone with a mix of pride and trepidation. Pride arises from the achievement of heightened status within the community of educated women and men. But there is trepidation about what lies ahead at the next level.
In the era after the Financial Crisis, pundits, investment commentators, and the media falsely maintained a constant proclamation that interest rates were just about to rise and that the collapse of the bond market was imminent. When the Federal Reserve Bank (Fed) first lowered interest rates to 0%, the pundits proclaimed irresponsibility and that inflation would skyrocket.
Although frontier markets are a small subset of the emerging market universe, we think they represent an important constituency that offer some compelling potential opportunities. Here, I've invited my colleague Carlos Hardenberg, senior vice president and director of frontier markets strategies at Templeton Emerging Markets Group, to outline some of the opportunities he sees in these dynamic markets and debunk some of the urban myths..
Low-cost, high-grade coal, oil and natural gas - the backbone of the Industrial Revolution - will be a distant memory by 2050.
Adam Butler introduces a simple but novel innovation for modeling equity market valuations. There are reasons to believe average valuations should rise through time in response to changes in market structure. We discuss the conditions that might lead to higher valuations through time, and present a model to account for it.
An analysis of five international stock markets indicates that published findings of a correlation between US stock returns and the political party in the White House are spurious, highlighting the importance of caution in interpreting historical investment data.
With the probability of recession sometime in the next five years around 70% in our view, now may be a critical time to prepare for when the cyclical tailwind that began last year begins to fade. Over the next five years, the global economy may undergo five significant pivots in the direction and scope of monetary, fiscal, trade, geopolitical and exchange rate policies. Are investors too optimistic about the future economy? We address this and other crucial questions in PIMCO’s 2017 Secular Outlook – our long-term view for the global economy and markets.
We thought it would be very helpful to review Warren Buffett’s argument in 19991, the last time there was very high expectations attached to technology stocks and to the overall level of common stock prices. We will reference Buffett’s quotes by the year he said them. The sections labeled 2017 offer our current observations on the markets and thoughts from respected experts.
Analysis of the Value factor in the US by sectors. Using price-to-book (PB) or price-to-earnings (PE) results in similar Value factor performance. Some sectors are perpetually expensive while others are always cheap. Sector rotation is higher with PE than with PB.
Expected earnings are increasing nicely – now at a double-digit pace. These have been better predictors than any of the oft-cited bearish valuation methods. The chance of a recession, the biggest historical threat to markets, remains very low. The list of “geopolitical concerns and headwinds” does not translate into an impact on earnings.
“It was the best of times, it was the worst of times…” to borrow a phrase from Dickens’, Tale of Two Cities. As 2016 came to a close it seemed truly the best of times for many. Following the US election, there was renewed hope and optimism for growth initiatives, as well as public policies, which generated a sense of certainty and euphoria about the future.
Jae S. Yoon is the chief investment officer and a portfolio manager at New York Life Investment Management, where he oversees approximately $293 billion in assets. In this interview, he discusses valuations across global asset classes and where he sees the greatest opportunities.
How can equity investors address the triple threat of a low return environment, scarcity of alpha and the tendency to chase performance?
With political uncertainty on the rise in D.C., will market volatility spike? Russ discusses why the economy and credit markets matter more.
This is the final report of our four-part series on trade. This week, our discussion on trade continues with a look at the relationship between trade, employment and inflation. We also conclude the series with market ramifications.
"Three steps and a stumble" was first illustrated by Edson Gould, the legendary market technician from the 1930s through the 1970s. Ultimately the baton was passed from Gould to another legendary market analyst (and my mentor/boss for my first 13 years in this business), Marty Zweig, who incorporated the "rule" into his monetary policy indicator.
Recent introductions of multi-factor Smart Beta products demonstrate causality among its components and an ability to replicate past future pricing. Unclear is the extent to which Smart Beta adequately discerns the directional value of securities at points of inflection to consistently outperform allocated Beta, Index-plus or Alpha portfolio strategies.
Following the election, stock market participants gained optimism on the view that the new administration would push through a reduction in regulations, sharply boost infrastructure spending, and achieve broad tax reform.
Today’s indexing mania is driving the marketing people at the best active fund complexes completely crazy, but the top portfolio managers – that is, the people who really, truly enjoy investing – are seeing a lot of new opportunities.
Robert DiMella is an executive managing director and co-head of MacKay Municipal Managers team, overseeing approximately $20 billion in municipal bond assets. In this interview, he discusses the opportunities for muni bond investors and the outlook for the coming year.
This letter will cover the philosophical underpinnings of my thinking. I’ll also introduce some investment tools (which I will give you access to through a link later on in the letter) that express that philosophy, but you could also design a different answer that fits your own (or your client’s) portfolio construction.
One of the most hotly contested debates in finance is the argument over which is better – active or passive investing. Moreover, this debate has spurred numerous academic studies that claim to identify whether passive outperforms active investing or vice versa.
Why understanding Environmental, Social and Governance (ESG) factors is critical for credit analysis of European utilities.
K2 Advisors’ Founding Managing Director David Saunders is speaking at the prestigious SALT conference this month in Las Vegas, where he’ll discuss the liquid alternatives landscape and why he thinks now’s the time for investors to consider this asset class.
When looking to help diversify a multi-asset portfolio, one of our experts presents the case for when and why an investor might consider senior loans.
In this Q&A, Kathleen Gaffney and Henry Peabody share their outlooks for the bond market and the impact of stronger global growth, and how they seek to position the Multisector Income strategy.
Active management has the potential to provide diversification, generate income and mitigate the risks of higher inflation and rising rates.
In this multi-part report, we offer reflections on trade to provide insight into how to use macroeconomics to judge the veracity of certain claims.
Socially responsible investing (SRI) has captured nearly a quarter of U.S.-based assets. New evidence from one of the world’s largest sovereign wealth funds shows that those investors are sacrificing significant performance. Indeed, they are giving up more than 1% a year – effectively doubling the typical 1% AUM advisory fee.
Our analysis of three first-generation smart beta strategies shows factor-replicated portfolios are ineffective substitutes for their smart beta counterparts, exhibiting poorer performance, high turnover, and low capacity.
Despite our negative outlook, markets have the final say. It’s important for us to make a partial retreat from our bearish position, temporarily at least. It’s much easier to be objective when we don’t have a lot at stake.
China A-shares could shortly be included in a key international benchmark for the first time—in a way that highlights smarter efforts by the West to help China integrate fully into global markets.
Incoming “soft data” and “hard data” conveyed vastly different U.S. economic conditions as the first quarter unfolded.
Economic data in April was mixed, with first-quarter weakness lingering in some risk indicators. Overall, though, the news was positive, and most forward-looking indicators we track bounced back from decreases in March.
As the VIX flirts with single digits, the S&P 500 has been flopping around like a live fish on deck. But for U.S. investors in foreign equities, the music continues to play as cheaper valuations overseas and a weaker U.S. dollar pushed fund flows into other geographies.
It is unfortunate that Blanchett’s article misses the central point that the Quantitative Analysis of Investor Behavior (“QAIB”) measures the mutual fund investor experience and not the areas raised as concerns. In fact, the author admits by his ignorance of its contents that he has not read the report that he so roundly criticizes.
I presented at a recent advisor conference alongside a famous economist. He told a story about an investment manager who told him, “You know… it is easy to pick out the investment amateur in any room.” He said, “He’s the person who says, ‘it’s different this time’.”
After years of relying on monetary policy to stabilize the U.S. economy, policymakers have redoubled their commitment to stronger pro-growth fiscal policies. As post-election Washington sets its sights on growth-oriented reforms, policymakers should remember that economic growth in any nation is determined by the four basic factors of production—land, labor, capital, and entrepreneurship.
A spending rate is a key factor for retirees' success. Just as budgeting and savings discipline are bedrocks to reach your retirement objectives, having a personal spending plan during your retirement is critical to prevent you from potentially outliving your dollars.
Lower correlations, coupled with greater dispersion of volatility across sectors, highlight the importance of asset allocation and could lead to more opportunities for outperformance by active managers over passive beta strategies.
So far in this earnings season, with over half of companies having reported, the energy sector has experienced the biggest earnings surprise. Earnings have come in almost 23% ahead of analyst estimates, nearly double the surprise of the consumer discretionary sector.
The middle class is a fairly new development in economics. Up until the last century or two, most societies had a tiny wealthy elite and great masses of common laborers. We now regard having this group in the middle, not wealthy but with their own assets and spending power, as a great achievement. We don’t want to lose it, but some people fear we will.
At the beginning of the year, most market strategists were in agreement that interest rates were going to rise in 2017. The reasons varied: some saw inflation climbing, pushing yields higher; others worried about bigger budget deficits; a few blamed the Federal Reserve, which was thought to be planning to raise short-term interest rates two or three times and shrink its balance sheet. Whatever the reason, interest rates were expected to head higher, so seeing the 10-year U.S. Treasury yield here at 2.3% is a surprise.
