More From Russ Koesterich, CFA
Disposable Income Is Still Below Historical Averages
Disposable income refers to the income available to a household or individual after paying off personal current taxes. Disposable income is still below historical averages.
Why tight credit spreads usually mean a period of global expansion
Today, most measures of credit conditions are positive, with tight spreads across all of fixed income. Even high yield spreads have come in after a short scare last month.
The Great American Deleveraging: Fact or Myth?
The great American deleveraging has largely been limited to the financial sector (XLF) (IYF). Non-financial debt is still much higher than historical averages.
Investors Should Avoid Defensive Sectors If Rates Rise
Valuations are at the higher end of their historical range. Investors should avoid defensive sectors, which are highly sensitive to interest rate changes.
Greek Debt Crisis 101: Getting To The Crux Of The Matter
According to estimates by EuroStat, Greek debt stood at more than 315 billion euros at the end of September 2014.
Rate hike horizon: September’s jobs report was largely positive
After September’s strong jobs numbers, a Fed rate hike could be on the horizon early next year. Russ explains two equity market implications.
Market Paradox: Stocks Reach Record Highs Despite Headwinds
We’ll explore whether record highs signal a top for equity markets or whether there’s still some room for growth in the current bull market.
How Lower Interest Rates Elevated Market Valuations
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.
Get Ready for a ‘Low for Longer’ Interest Rate Environment
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.
You should pay particular attention to this valuation metric
I would pay particular attention to the Shiller P/E Ratio, which is a variation on the Cyclically Adjusted P/E or CAPE. This indicator is worth watching as it has historically correlated with long-term stock market returns.
How Stocks and Bonds Reacted to Trump’s Victory
The CBOE Volatility Index suddenly rose 6.0% on November 9, 2016, after it was clear that Trump had unexpectedly clinched the election.
Rising Stocks: Why It May Not Be Time for the Jitters
Rising stocks have been buoyed by various factors, including the accommodative monetary policy of the Federal Reserve and robust US corporate earnings.
Things you need to do today before inflation takes off
So what should investors be doing today? While inflation may take another year or more to get going, it’s not too early to start implementing long-term inflation hedges.
4 must-know facts about rising inflation and your portfolio
Recent readings have shown that inflation has stabilized, which is a good thing, but signs of an imminent acceleration in inflation are still scant.
Why Is a Global Recession Unlikely?
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.
Why European Politics Are Likely To Take Center Stage in 2015
After a year with relatively less drama, European politics are likely to return to center stage next year.
Is It Time to Play Value Stocks?
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.
What Stretched Utility Sector Valuation Means
Utility sector valuation appears stretched. 2014 was a great year for utilities, which gained 26.62% ex-dividends and were the best-performing sector.
You Are Living in a Low-Return Environment
Equities slumped worldwide after the shocking Brexit vote, but US equities had already become directionless. We’re definitely living in a low-return environment.
Must-know: The aging population’s impact on the economy
The number of people above 65 years is expected to triple from 531 million in 2010 to 1.54 billion in 2050—the population of seniors in the U.S. (IVV) (SPY) is expected to more than double and increase from 41 to 86 million in the same time period.
Why Unconstrained Bond Funds Could Be Useful Now
Unconstrained bond funds use leverage and derivatives in their portfolios, which magnifies their risk. They have exposure to both credit and interest-rate risk.
Why Holding Cash Is Risky In The Long Run
Holding cash is risky, as it provides negative real returns in the long run.
Why Volatility Is Likely to Stay High
With growth projections of most major economies falling, it is likely that volatility will stay elevated.
Major central banks are now diverging in their monetary policies
Major central banks are now diverging in their monetary policies, a dynamic we saw vividly on display last week with the Federal Reserve ending its quantitative easing (or QE) program, while Japan expanded its version of QE.
Do Large Caps Offer More Value Relative to Small Caps?
Large caps will be in a much better position to navigate through this period given their cash positions.
Why has volatility picked up in frontier markets?
While these exotic markets are not for everyone, more aggressive investors should consider having a small strategic allocation to the frontier.
Does The US economic Recovery Mean That A Rate Hike Is Possible?
The US economic recovery is truly on. This is great news for the US stock markets, which went up after the news.
Low Interest Rates Have Kept Bond Yields Low
Weakness in the labor market means low interest rates. The US economy is gaining momentum with stellar growth rates in the last two quarters. It grew by 4.6% in 2Q14.
Why wage growth could cause rates to rise
Wage growth could cause rates to rise. A hike in wage rates could boost consumption and encourage individuals outside the labor force to join. This will increase disposable income.
Why analysts expect a further slowdown in Europe to be modest
In addition, many market watchers are concerned about slowing growth in the Eurozone. While the region is unlikely to boom anytime soon, there are some signs that any further slowdown there should be modest.
Why frontier markets are good diversifiers for your portfolio
Diversification: Finally, companies in frontier markets tend to just focus on demand in their local countries and thus are less tied to the global economy than emerging markets like China and Brazil. As my colleagues Del Stafford and Daniel Morillo pointed out last fall in blog posts, this means frontier markets have exhibited a low […]
Developed Markets Offer Value after the Rout
Developed markets are offering value. The Eurozone has come out of the recession and is seeing some green shoots of growth.
The Strengthening US Dollar Has Affected Oil Prices
Weak global demand and a strengthening dollar have affected oil prices.
Turn to Financials and Healthcare When Fears of Rate Hike Loom
With classic safe havens providing little protection, turn to financials and healthcare sectors for opportunities. Healthcare stocks usually hold up well in the run-up to a rate hike.
Why investor sentiment can show overvaluation in US markets
While valuation is important, investors should also pay attention to sentiment. The goal is to gauge how – to steal a phrase – “irrationally exuberant” investors have become.
Why Consumption Will Remain Soft in Australia
Much like US consumers, Australian consumers are in the process of repairing their balance sheets.
Subdued Retail Sales Could Hurt Consumer Stocks
The last three months have seen subdued retail sales despite lower oil prices.
A Weaker Euro Could Lead to Inflation in Europe
A weaker euro could lead to inflation in Europe. The depreciation in the euro was initially due to the appreciation in the dollar.
Must-know: Which safe havens are truly safe?
Although not considered safe haven assets, in the current context of high geopolitical risk and consequently volatility, investors could consider investing in sectors like energy and large cap companies.
Inflation Remains Subdued
Inflation remains subdued by all measures. Since inflation is way below the Fed’s long-term target, the Fed can afford to keep interest rates lower for a little longer.
Slower Growth Has a Silver Lining!
Slower growth has a silver lining: the potential for greater monetary and fiscal stimulus.
The Pressure on Cyclical Commodities Is Likely to Continue
Commodity (DBC) prices have been heading lower since 2011, and commodities have been the worst-performing asset class of 2015.
What Has Caused the Correction in Transportation Stocks?
DJTI’s price-to-earnings ratio climbed from 15.7x at the start of 2013 to 20.2x at the end of 2014. This year, transportation stocks (IYT) have taken a hit, leading to multiple contractions.
A Strong Dollar Is a Major Headwind for Export-Oriented Stocks
A stronger dollar is a headwind for export-oriented stocks. The US economy is relatively robust.
High Yield Still Has a Place in Most Portfolios
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.
Must-know: Why volatility is likely to tick up in September 2014
While volatility fell over the course of August, the VIX’s daily average for last month was approximately 15% higher than its average over the previous three months.
Why Small-Cap Banks Have Been Underperforming
Small-cap banks have been underperforming due to the yield curve that has been flattening since the start of 2014.
Why a Chinese Market Slump Won’t Affect the Economy
The Chinese market slump is not likely to dampen consumer spending or affect the economy. Stocks make up a mere 15% of Chinese household financial assets.
Why emerging markets offer value to your portfolio
Truth: Emerging markets offer value. Given that they’re generally growing faster than their developed world counterparts, emerging markets still look cheap by most metrics.
Why Real US Rates Have Been Climbing
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.
Why Changing Gears to Focus on TIPS Could Be Rewarding
The market may be too complacent about inflation expectations at the moment. If this is true, this makes TIPS attractive at the moment.
Must-know: Factors that could be headwinds for stocks in 2015
The Fed has already ended the quantitative easing (or QE) program. It could increase rates in mid-2015. This could be another headwind for equities.
Market Rebound Causes Stretched Valuations
A market rebound of more than 12% from the depths seen in October has left investor sentiment buoyant.
The Strong Dollar Is Dragging Down US Companies’ Revenues
As earnings reports and analyst call transcripts show, many of the companies reporting sales misses cited the strong dollar as a contributing factor.
High Yield Offers Attractive Potential in a Yield-Starved World
In an environment of generally decent, albeit recently disappointing, growth and gently rising yields, high yield offers attractive potential in a yield-starved world.
Soft European Growth Could Affect US Indexes
Soft European growth could affect US stocks. Growth in Europe (EZU) has been weak for a while now, which is concerning.
Could your portfolio handle a spike in geopolitical risks?
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.
2015 Saw Rising Volatility yet Stagnant Returns
Keeping with his annual tradition, Russ compares the year that was to the year that he expected.
US Stocks Are Less Attractive than Global Options
As we’ve suggested throughout this series, US stocks don’t have a clear growth catalyst once interest rates rise. Still, you may find value in select sectors such as financials and technology.
Could an adverse reaction to Fed tightening rattle the markets?
Another possibility is that an adverse reaction to Federal Reserve (or Fed) tightening could rattle markets. But here again, the risks are likely overstated.
Why demand for gold may be waning around the world
The fraction of total gold output held by central banks around the world has continued to decrease over the last decade and a sharp reversal in this trend is unlikely.
European Euphoria Captured Markets Last Week
European euphoria captured markets in Europe and took them by storm. The Stoxx Euro 600 Index surged 5.1%, marking its biggest weekly increase in almost three years.
Must-know: Many investors fear stocks—is this good for markets?
Currently, the S&P 500 is giving year-to-date (or YTD) returns of more than 8%. It posted gains for seven consecutive quarters. The S&P 500 Index (SPY) closed at a new high 34 times in 2014.
Increased Mergers and Acquistions Help, But Headwinds Persist
Increased mergers and acquisitions activity in the past couple of weeks has supported US equity markets (SPY).
Dotcom Bubble 2.0? We Don’t Think So!
Although tech stocks have been buoyant in 2015, we don’t think that this means the advent of dotcom bubble 2.0. There are some key differences.
Structural Considerations Could Mean Lower Yields in the Future
Many structural considerations are likely to keep yields low in the future. Demand for Treasuries and bonds is likely to be more than the supply in the next two years.
Why there might be a downside to a strong US economy
Of course, a strengthening U.S. economy may have a downside. If the Federal Reserve (or Fed) increases interest rates too soon or by too much, markets could be rattled.
Why the CFNAI Has Historically Led Overall Growth
There are no truly reliable measures of future growth. That said, certain economic statistics have historically led overall growth.
Stellar returns: Why you should consider frontier markets
While a traditional emerging market benchmark is up 1.5% year-to-date, frontier, or “pre-emerging” markets, have been performing well.
When Do Mega Caps Outperform Small Caps?
Mega caps outperform small caps when interest rates rise. The last two rising rates scenarios took place during the late 90s and in the mid-2000s.
Consumption-Driven Emerging Markets Appear Attractive
Not all emerging markets (EEM) seem investment-worthy. Only some consumption-driven emerging markets appear attractive.
High-Dividend Emerging Market Funds Offer A Cushion
High-dividend emerging market funds offer a cushion when you face market volatility.
Recommendation: Keep municipal bonds in mind
While no longer cheap per se after their extraordinary run in 2014, municipal bonds continue to look attractive versus both Treasuries and corporate bonds.
The Federal Funds Rate: Why The US Dollar Could Appreciate Further
The federal funds rate is a tool that the Fed uses to control the interest rate in the economy. The rate has been close to zero for over six years.
Why emerging markets offer far less “fiscal baggage”
Finally, the majority of the emerging market countries have much less “fiscal baggage” than their developed market counterparts.
Why You Should Favor Credit over Duration When it Comes to Bonds
Favor credit over duration as interest rates rise. Look for tactical opportunities within fixed income.
Defensive Stocks And REITs Look Overpriced
REITs are providing an average dividend yield of 3.5%, so investors are drawn to them. This is causing rich valuations and making REITs look overpriced.
A Softer Rebound Could Move Markets in the 2Q
A softer rebound could move markets in the second quarter. If the economy remains weak in the second quarter, the Fed has some leeway to maneuver the rate.
Why small-cap stocks have been lagging behind in 2014
For example, at least historically, small cap valuations have been more sensitive to changes in monetary conditions than their large-cap counterparts, and this was evident last week.
Why some bad news may be good news for international stocks
Bad news may be good news for international stocks. Europe is struggling with deflationary headwinds and Japan is suffering under the burden of last April’s hike in the consumption tax.
Your Best Bets For A Good Inflation Hedge Right Now
Although inflation is low, it’s a good idea to have a small amount of inflation hedge in your portfolio. A small inflation hedge adds diversification.
How to Ballast Your Portfolio with Bonds
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.
Emerging Market Dividend Payers Currently Offer Value
Emerging market dividend payers are offering value, given their high volatility.
4 must-know reasons why you should invest in frontier markets
So-called frontier markets (FM) – those markets that are still at a very early stage of development — have been among the best performers in 2014, outperforming global markets (ACWI) year to date.
Why frontier markets are still cheaper than emerging markets
And while firms in frontier markets are less profitable than emerging market companies, frontier stocks look inexpensive even when this difference in profitability is accounted for.
Why you should stick with US large caps and high yield
Within the United States, I recognize opportunities, particularly in large cap, cyclical names. On the fixed income side, high yield now represents an attractive option given recent spread widening.
Key investor takeaways: Pay attention to Japanese equities
For now, we continue to expect a world in which U.S. growth overshadows that of other developed countries, resulting in a strong dollar and weaker commodity prices.
Must-know: Why investors should focus on relative value
Focus on relative value. Given that most asset classes look expensive, I continue to prefer market segments that offer relative value.
How Has the Volatility of Gold Changed over the Years?
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.
The Basic Tenet of Portfolio Construction: Diversify
Diversify your portfolio for better risk-adjusted returns. From a portfolio diversification point of view, the correlation between two asset classes should be close to zero.
What Should Be The “Right Amount” of Cash Allocation?
If you’re preparing your portfolio for the short term, the allocation to cash should be high. As the horizon increases, allocation to cash should go down.
Recommendation: Look outside the US for stock bargains
U.S. stocks are no longer cheap, and that has stocks outside U.S. borders looking even more reasonable. Specifically, I see opportunities in Japan.
Where Can You Invest, Given the Strength of the Dollar?
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.
Times Change: Why the Dow Theory Is Less Applicable Today
The economic make-up of the US has changed significantly over the past century, making the Dow Theory less applicable today than it might once have been.
Why emerging markets seem relatively well-priced
EM currently trades at a big discount to DM. Emerging market (EM) equities are trading at 1.5x book value, while developed markets (DM) are trading at 2x.
Must-read: Key takeaways for investors in the banking sector
The longer term outlook for Eurozone banks does look more positive than a year ago given reasons including the substantial deleveraging, capital raising by local banks and the European Central Bank (or ECB)’s recently announced ABS purchase program.
Small caps trade at a premium, but can you justify this premium?
Today, small-cap indices are trading at a relatively expensive level versus large-cap companies. When real rates were negative, this premium was more justified.
Slowing Global Growth Could Keep Commodity Prices Low
Industrial commodities are likely to see lower prices as demand falls with slowing global growth. Yet a decent entry point doesn’t seem to be on the horizon.
Why Fed and Bank of Japan monetary policies are at odds
Last week, the Bank of Japan unexpectedly expanded its own version of quantitative easing. This announcement came shortly after an inflation report showed that Japan’s CPI has dipped to 1%, meaningfully below its target.
Where Are Oil Prices Heading?
Oil prices are expected to be lower for longer. This is bad news for high yield bond funds (HYG) (JNK) in the United States.