Risk taking is in, but is risk underpriced again?
►The seesaw continues with risk assets doing particularly well this past week
►US large caps performed best – up 2.9% for the week, but International Developed equities were only slightly
►Bond strategies delivered positive returns last week as well but significantly below those of more risky asset classes
►On a YTD basis, US small caps lead the pack by a slight margin – up 15.5%
►In the context of balanced 60/40 strategies US strategies and international strategies performed in line with each other (both up 1.9%)
►Aggressive focused multi-asset class strategies out-performed less risky options
►Within equities, Growth has slightly out-performed Value in 2019 and over the last year Growth also remains solidly ahead
►Thus far in 2019 more aggressive multi-asset strategies have outperformed less risky portfolios
Currencies:
►A rare down week for the USD as expectations for growth in the US slow down and the Fed remains on hold
►For 2019 we still expect the USD to depreciate slightly
►A depreciating USD will boost international asset returns – we expect this effect to persist in 2019
►A big question mark for this coming week is what happens to Brexit (yet again) – sterling is being massively tossed around depending on political prospects
►Interestingly, the pound has held up admirably during this period of uncertainty and is now in a Break Out phase
►The Yen is now in a Break Down phase as investors have regained their desire for risk
►In general, FX volatility has increased substantially in the last couple of months
Commodities:
►After a bad prior week, ag commodities rebounded strongly with wheat, the most beaten down of the group, up over 6%
►The tension in the grain complex is mostly supply driven but soybeans also are being affected by trade negotiations with China
►Commodity indices have moved into an Improving phase as oil markets have found some stability
►Gas was down slightly last week and remains in a Down Trend magnified by weak seasonality
►Copper kept its gains from the previous week as global growth only slows down slightly
►Gold and Silver were flat last week and are showing divergent patterns – gold being stronger than silver
►While inflationary expectations remain low, commodity prices are an excellent hedge should things change
This Coming Week:
►While risky assets have recovered we still think that risk is being shunned at the moment – investors seem uncomfortable making bold bets
►While not comfortable, US investors should consider allocating more money to non-US stocks due to their lower valuations and potentially a depreciating USD
►The strong USD will not persist much stronger as the FED appears close to the end in terms of interest rate hikes
►The Value/Growth discussion is being overshadowed by sector rotation but on a risk-adjusted basis we believe that higher allocations to Value are warranted
►We are also watching out for any jump in inflationary expectations (which have been trending down)
►Tariffs are inflationary and will be reflected in higher consumer prices eventually
►Our biggest concerns revolve around a slowing global economy – The IMF recently lowered 2019 growth numbers to 3.5%
►We still see a risk on/off market this year making it difficult for short-term investors – probably best to extend horizons
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ic J. Weigel
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