But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Cheap asset: Why zero interest rates have led to low volatility
Low interest rates have propped up the economy over the last few years. They’ve also supported bond markets since low interest rates mean low bond yields.
The fact that volatility levels remain as low as they are today suggests that the market hasn’t factored in the possibility of geopolitical risks picking up.
The volatility index tends to be high when the economy is in a standstill or recession. That’s when credit markets tend to freeze.
Less volatile equity markets have led to the underperformance of VIX funds. The iPath S&P 500 VIX fund has lost about 37% since the start of the year.
If inflation picks up, the Fed will hike rates to rein it in. This would lead to Treasury yields increasing, which could cause Treasuries to underperform.
Due to the Fed’s bond buying program, the Fed’s holdings have continued to rise. The quantitative easing (or QE) program ended last month.
So why does this matter for investors? To the extent there is even a modest pickup in capital spending, this should help support U.S. equity market valuations.
While still relatively low by official estimates, capital utilization rates are probably overstating the amount of excess capacity, given the rapidly aging nature of the capital stock.
I would expect real long-term yields to continue to normalize, a development that in the past has been associated with higher levels of capital spending.
I expect the U.S. economy to grow by at least 2.5% this year, above last year’s 2% rate. This should provide CEOs and CFOs with greater conviction on end-user demand.
Consumer confidence, while low, is improving. During the first half of 2014, the Conference Board’s measure of consumer expectations averaged a little below 82, a material improvement from the previous four years.
While companies clearly have the means to invest, they lack the confidence in the face of a still nervous consumer and uncertain end-user demand.
Emerging market bonds help diversify your portfolio, given their low correlation.
Emerging market debt is still a volatile asset class when compared to more traditional fixed income investments. As such, allocations to this asset class will largely be a function of an investor’s individual risk appetite.
Let’s compare yields for emerging versus developed market bonds, using ten-year US Treasuries (IEF), BofA Merrill Lynch AAA-A Emerging Markets Corporate bonds, and the BofA Merrill Lynch B and Lower Emerging Markets Corporate bonds.
Most emerging markets have less debt compared to their developed market counterparts. This means emerging market bonds aren’t as risky as you may think!
Emerging market bonds have been one beneficiary of today’s low yield environment. Is it too late to allocate to this asset class?
The Chicago Business Barometer summarizes current business activity. It’s also known as the Chicago purchasing managers’ index or Chicago PMI.
Conducted by the Federal Reserve Bank of Richmond, this monthly survey of manufacturing activity gauges manufacturing in the Fifth District of the US.
Each month, the Federal Reserve Bank of Dallas conducts its Texas Manufacturing Outlook Survey. The survey involves about 100 firm executives reporting on how business conditions have changed for a number of indicators.