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Asset Allocation Insights – Federal Reserve Words Stop the Bleeding for Now

Federal Reserve Indicates Rates Close to Target

  • Risky assets roar back after last week’s tough week as the Federal Reserve indicates that short-term rates are close to “normal”
  • US large cap, in particular, staged a nice earnings-related recovery
  • REITS continue quietly performing well – up 5.8% for the year (best among our key asset classes)
  • EM stocks also continue their recovery an are up 2.5% over the last month
  • Aggressive, domestically focused multi-asset class strategies outperformed less risky and more internationally focused allocations
  • YTD lower risk asset allocation strategies have outperformed especially if the allocations involved international equities
  • Commodities remained volatile and subject to the direction of oil prices – the trend is still negative

Currencies:

  • The USD appreciated slightly last week and remains in a significant Up Trend
  • The South African Rand continues recovering from oversold conditions
  • The British Pound continued depreciating due to major uncertainty regarding whether BREXIT will pass Parliament
  • The Mexican Peso recovered a bit last week as a new administration is sworn in this week
  • In general, FX volatility has increased substantially in the last couple of months

Commodities:

  • Commodity indices continue in a Down Trend as oil markets had another down leg
  • On the flipside, grain prices have been recovering since the summer with soybeans again up last week
  • Lumber prices continue being extremely volatile and remain in a Down Trend
  • Gold and Silver were slightly down last week and barring a real crisis continue on a downward trend especially in light of higher short-term interest rates

This Coming Week:

  • Home bias keeps winning as multi-asset strategies with international assets have significantly underperformed
  • The strong USD is partly to blame and the end may be near as the Fed indicates rates close to “normal”
  • We still foresee one further rate hike in the US in December but fixed income market conditions have stabilized
  • Our view is that volatility is here to stay
    • In fact, we see current asset class volatility as normal
  • We are also watching out for any strong jump in inflationary expectations (which have been trending down)
    • Tariffs are inflationary and will be reflected in higher consumer prices eventually
  • EM equities, in particular, are recovering but will end up in the red this year
    • We still believe that an allocation is warranted
  • Growth outperformed Value last week but we are seeing signs of industry rotation toward value sectors
    • The Momentum trade while still ahead YTD is losing strength despite a bif up week
  • The G20 meeting concludes – the US and China are still at odds over tariffs but maybe rational minds will prevail?

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To read our full weekly report please click here

Eric J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

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Weekly Asset Allocation Review – Free

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