Russ Koesterich, CFA

The US economy added ~215,000 jobs in July, compared to ~260,000 in April and ~231,000 jobs in June. Although this number is dipping, it is still above the 200,000 mark, which is usually seen during economic booms.

US technology stocks have been split this year. NASDAQ closed at an all-time high of 5,106.6 on May 27. It took NASDAQ almost 15 years to regain the 5,000 levels.

Keep a close eye on further developments in the unfolding Greek debt drama and hope that it does not turn into a tragedy.

President-elect Donald Trump’s policies have the potential to push prices and inflation levels up.

The CBOE Volatility Index suddenly rose 6.0% on November 9, 2016, after it was clear that Trump had unexpectedly clinched the election.

Investors have once again flocked to bonds, the Japanese yen, and gold due to the 10.0% fall in China’s exports and concerns over a major rejig by the central banks.

What about the impact on interest rates? Here again, there is no consistent relationship between spending and interest rates.

Even if spending does rise, will it matter for the stock market? While there will doubtlessly be some stocks and segments that benefit, over the past century there has been no consistent relationship between federal spending and equity returns, as defined by the Dow Jones Industrial Average. Nor has there historically been much of a […]

Many economists agree that the United States needs to shift from a reliance on monetary policy to more fiscal stimulus, but it is not clear that the political stars are aligning to do so…

Russ argues that the election may have less of an impact on markets than many are expecting.

On September 12, 2016, the Federal Reserve governor, Lael Brainard, hinted at a possible delay in the hike of the Fed rates.

The negative interest policy of the central banks is casting government bonds as a futile choice for investors compared to stocks and gold. As a result, bond prices dipped and yields started rising.

Gold is valued in dollars. As a result, the stronger dollar, driven by the recovery of the US economy, is pushing the gold prices further down.

Gold prices have gained 21% YTD in 2016 and closed at $1,308.40 on September 16, 2016.

The performance of gold as a contrast to the S&P 500 is reflected during periods of high and low volatility. The S&P 500 has always outperformed gold since April 10, 2013, during periods of both high and low volatility.

In 2015, gold prices had shed 9.6% YTD and closed at $1,060 on December 30, 2015. The precious metal, which had recorded a double-digit growth rate in January, started dipping in March.

Gold’s yearly performance dipped for the first time in ten years on April 10, 2013. Consequently, on the same day, the Dow, the S&P 500, and the NASDAQ rose 0.9%, 1.2%, and 1.8%, respectively.

It’s true that market volatility has been unusually low lately, but it’s expected to rise. There are several ways to mitigate the impact of rising volatility and historically, gold has been one of the more effective tools.

Lower interest rates have an inverse relationship with stock prices, so when interest rates are lower, the S&P 500’s trailing price-to-earnings multiple rises.

Nominal gross domestic product in the United States is strongly correlated with the trailing-12-month earnings growth of the S&P 500.

Currently, the US benchmark index, the S&P 500, has risen 6% year-to-date. The market is trading at higher valuations compared to its historical average.

Improving fundamentals in emerging markets and higher commodities prices have helped emerging markets to deliver higher returns.

The correlation between oil and high-yield bond indexes is very high. Where oil goes, high-yield bonds follow.

The three-month Volatility Index (or VIX), which measures the implied volatility of options on the S&P 500 stock market index, is approaching record lows.

Yields on high-yield debt (HYG) (JNK) and spreads between high-yield debt and Treasuries both fell over the last year.

High-yield bonds provide higher yields to a portfolio. Minimum volatility stocks provide some cushion when equities fall.

Between 2003 and 2007, when the economic growth was strong, the correlation between stocks and bonds was -0.18.

The ten-year Treasury (IEF)(TLH) yields are currently testing their all-time low at around 1.5%.

The US market (IWF) (IWD) is looking expensive based on historical valuation multiples and also relative to many other developed markets.

Based on the Fed Model, Bank of America Merrill Lynch argues that stocks are still cheap compared to bonds despite the recent rally in the S&P 500 (IVV) (SPY).

Under the current uncertain economic circumstances, investors flocked to emerging market debts in search of higher yields.

Emerging markets are looking attractive. In July, after nearly a year, stocks hit the highest level after chances of an interest rate hike by the Fed abated to a large extent.

All major countries have reined in their deficits in the last six years. A fiscal deficit usually means the government has to issue bonds in order to bridge the gap.

The reason for low yields lies outside the United States. Global yields have been heading south over the last ten years.

The US GDP growth rate is on a somewhat solid footing compared to the rest of the world. The stronger dollar has been a drag on exports and, by extension, on GDP growth.

We could see fewer jobs added going forward. If this trend continues, bond (AGG) (BND) yields could most likely stay low.

As we’ll see in this part of the series, the monetary stimulus has been less effective in Europe and Japan.

Equities slumped worldwide after the shocking Brexit vote, but US equities had already become directionless. We’re definitely living in a low-return environment.

Since December, ten-year Treasury yields have fallen by 2.1% to 1.6%.

The defensive sectors appear more expensive than they have been in the past, as well as more expensive than cyclical sectors.

Yields remain at unattractive levels. This has caused yield-thirsty investors to flock to high-dividend-yielding stocks, driving their valuations higher.

Not only are European stocks cheaper than American ones, they also offer more attractive dividend yields.

There are no truly reliable measures of future growth. That said, certain economic statistics have historically led overall growth.

A number of factors have contributed to the slowdown, including soft overseas growth and a sharp drop in capital spending by energy and mining companies.

The data from the Bureau of Labor Statistics shows that average hourly earnings have reached $21.45, up by 2.5% YoY, and represent the highest growth since January.

In the 1990s and 2000s, when gold prices tracked inflation, although the correlation seems to be a bit weak compared to the 1970s and 1980s.

J.P. Morgan’s analysis states that gold has outperformed equities, bonds, and a broad commodities index in a low interest rate environment.

Generally, gold is viewed as a hedge against rapid inflation and lower interest rates. That makes it hard to value gold as there are no cash flows or earnings associated with it.

With the rise in volatility and lower returns from the stock market, coupled with negative or lower bond yields, investors can consider gold to be a safe haven investment and an alternative asset class.

Adding carry to your portfolio in a low-return scenario could cushion your portfolio.

Volatility has been relatively low over the last few years. VIX averaged 14 in 2014, which is much lower than the long-term average of 20. It averaged 16.7 in 2015.

Since 2009, equities have staged a comeback. Between 2010 and 2015, the S&P 500 index has risen 10.3% on a CAGR basis. Most of the comeback is due to multiple expansion.

The S&P 500 is trading at 19.1x earnings, which is a 14% premium over its ten-year average. Emerging markets are trading around their long-term average of 13.5x earnings.

In the past few years, value stocks haven’t posted impressive gains. Many of them look cheap and have trailed the broader market as investors lap up growth stocks.

Manufacturing growth as measured by the ISM (Institute for Supply Management) index ended lower for the fifth consecutive month at the end of February. However, it rose in March

With the recent fall, some of these emerging markets have certainly become very cheap compared to most of the developed markets.

We have yet to see much stabilization in the global economic data, which could lead to volatile markets.

The recent correction in the global (SCZ) equity markets makes valuations very attractive.

Global equity markets (EFA) have been on a rollercoaster ride for the past few months. The sharp fall in stocks last year was initially triggered by fears of a hard landing in China (MCHI).

Municipal bonds (or munis) were the best performers in 2015 with returns of 3.2%. Meanwhile, investment-grade corporate bonds (LQD), long-dated Treasuries (TLT), and high-yield bonds (HYG) all gave negative returns in 2015.

The ten-year Treasury (IEF) yield has plunged in recent weeks. It dipped from 2.3% at the start of this year to ~1.6% currently, in a risk-off trade.

Increasing correlations between risky assets could leave your portfolio vulnerable.

Last year, the correlation between stocks and Treasuries increased. Adding Treasuries to an only-equity portfolio became less valuable.

The clear implications will be an oil glut that takes longer to work through and more downside for oil prices this year.

Iran never enjoyed the oil windfalls of Saudi Arabia, at least partly because it forwent oil profits in lieu of growing a nuclear arsenal.

It’s been more than a year since Saudi Arabia has had a new king, and what an eventful year for the country under his leadership!

Utilities (IDU), among other sectors like staples (XLP), are usually dubbed “bond proxies.” This is because the utility sector is sensitive to interest rates.

Keeping with my tradition of comparing the year that was to the year that I expected, here’s a summation of what went according to plan, what was sort of in the ball park and what was a total miss.

Keeping with his annual tradition, Russ compares the year that was to the year that he expected.

The market may be too complacent about inflation expectations at the moment. If this is true, this makes TIPS attractive at the moment.

It is advisable that investors allocate a small portion of their portfolio to cash to take advantage of the flexibility the asset offers.

Large caps will be in a much better position to navigate through this period given their cash positions.

Commodity (DBC) prices have been heading lower since 2011, and commodities have been the worst-performing asset class of 2015.

Preferred stocks have typically seen the highest yields in the investment-grade universe, which makes them an attractive alternative to other high yielding securities.

With yield likely to be a scarce commodity due to the global slowdown, utilities and other high-dividend paying sectors like staples (FSTA) are gaining investor attention.

Some emerging markets may benefit as Fed the holds off on a rate hike.

As I’ve discussed in the past, small caps have struggled this year despite optimism that a strong dollar would favor this style.

Rate hike has historically been a temporary headwind for stocks; it has rarely been a harbinger of a bear market.

There are certain market segments that are more sensitive to changes in monetary policy and may benefit if the Fed delays liftoff further.

The combination of a strong dollar and rising real rates is having a predictable effect on precious metals prices.

Real US rates have been climbing, while rates are falling in much of the rest of the world. As Russ explains, this divergence has a number of implications for investors.

Economic growth is the biggest driver of earnings growth. Earnings growth seems to follow the same trajectory of GDP growth.

Valuations on US equities remain lofty relative to other developed markets.

In order to assess the odds of an imminent recession, these three indicators are key to watch.

The difference between the yields on corporate bonds and Treasury bonds of the same maturities is often known as the “credit spread.”

Worried the US is on the cusp of another recession? Russ shares the economic indicators worth paying attention to.

TIPS may offer some value as inflation breakeven seems modest. TIPS provide investors a hedge against inflation just like gold (GLD) and other commodities (DBC).

Households are in the process of paying off debt, which means that not only is credit growth likely to remain tepid, consumption is likely to remain muted, and in turn, so is inflation.

Tepid demand from abroad, elevated inventories in the US, and an appreciating dollar (UUP) signal muted order growth.

Given the headwinds that consumption faces, consumer-related sectors—especially the US consumer discretionary sector—appear expensive.

With long-term rates stuck, utilities look less vulnerable, especially when you consider that utilities have underperformed other market sectors this year.

Global stocks, as tracked by the iShares MSCI ACWI ETF (ACWI), rose 6% since September 28. Weak economic data in the US could delay the rate hike.

The supply side is adding to energy sector headwinds (IXC).

The demand for commodities has been dampened by a variety of factors, particularly in the last two years.

The talk about the commodities slump (USCI) is almost ubiquitous. It is hard to ignore the freefall most commodities (DBC) seem to have been in during the past year.

The high volatility regime will likely be the norm in the future. State Street observed that the US market has already clocked 42 highly volatile days in 2015.

In its recent meeting, a dovish Fed pointed out that the “uncertainties abroad” made it risky to raise the policy rate and announced its decision to leave the federal funds rate unchanged at 0%–0.25%.

We can expect muted returns from US equities going forward. US stocks face the prospect of higher interest rates, albeit gradual and from unusually low levels.

While 2016 is likely to be another year of slow global growth, I don’t foresee a global recession. China remains a genuine threat, but the government has additional tools to manage a slowdown.

Commodity-exporting economies like Russia, South Africa, and Brazil have seen a massive depreciation in their currencies this year, but Asian currencies have not seen a big swing.