Russ is Head of Asset Allocation for BlackRock’s Global Allocation Fund. He works with portfolio managers to establish the fund’s macro-level views and also develops systematic strategies to augment the team’s security-selection process and risk management. He is the author of two books, including “The Ten Trillion Dollar Gamble,” on positioning portfolios for the growing U.S. deficit.
Disclosure: The content Market Realist publishes should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of BlackRock.
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.
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…
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 […]
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.
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.
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).
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 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.
Yields remain at unattractive levels. This has caused yield-thirsty investors to flock to high-dividend-yielding stocks, driving their valuations higher.
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.
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.
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.
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
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.
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.
Preferred stocks have typically seen the highest yields in the investment-grade universe, which makes them an attractive alternative to other high yielding securities.
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.
With long-term rates stuck, utilities look less vulnerable, especially when you consider that utilities have underperformed other market sectors this year.
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.
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.
Malaysia, Korea, the Philippines, Thailand, and China all have positive current account balances. This will position the emerging Asian economies well when the Fed does hike rates.
Within emerging markets, commodity-exporting markets like Brazil and Russia may not represent an opportunity, as commodity prices have tanked and don’t seem to be rising soon.
Where can you invest if the strength of the dollar is likely to continue? The stronger dollar is going to hurt the performance of large-cap stocks that have exposures abroad.
The US energy renaissance has been a game-changer in the crude oil (USO) space. Crude oil production has seen a massive increase in the last five years.
It’s likely that central bank policies in developed markets will continue to diverge. The United States is likely to see rising rates in the next few years, albeit from ultra-low levels.
There are pockets of value within US stocks. Small caps have outperformed large caps in the last 15 years or so, as interest rates have remained mostly low.
The Swiss frank is the only currency on the list that has appreciated against the greenback. Lower growth expectations in emerging markets (EEM) have caused their currencies to depreciate.
While higher volatility is here for the foreseeable future, the selloff has created a number of potential opportunities for investors with longer-term holding periods.
While I believe slow global growth will continue and remain below trend, the evidence suggests that the global economy is not on the cusp of another recession.
BlackRock Chief Investment Strategist Russ Koesterich discusses the catalysts for the brutal equity selloff and its key takeaway for long-term investors.
The Federal Reserve had fixed the federal funds rate between 0% and 0.25% to combat the effects of the recession caused by the US financial crisis (XLF).
