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Key Asset Allocation Insights – Weekly Review

The Week In Review

  • Asset allocation strategies came under attack last week as global capital markets saw the period of extreme calm come to an end
  • Between the “memo”, earnings week and Super Bowl preparations there was a lot going on
  • None of the key asset classes that we use in our asset allocation process escaped the increase in investor risk aversion. Volatility really spiked up on Friday
  • The Fed did not hike rates at Janet Yellen’s last meeting as Chair but did raise the specter of inflation
    We have been in the camp that believes that investors have been underpricing inflation risk
  • Three huge US companies (JP Morgan, Berkshire Hathaway, and Amazon) are planning to launch their own health care network. Nobody has found the cost-containment magic. Maybe self-insuring and pooling “healthy” employees is the way to go

Key Asset Classes:

Last week saw the best performing asset classes of last year take the biggest hit

Asset classes across the board suffered losses. Diversification only lessened the blow

 

 

 

Emerging markets still remain in an UP TREND but profit-taking may have set in

Interest sensitive asset classes are firmly entrenched in Down Trends

 

 


Currencies:

The USD keeps depreciating and the Trump administration seems to favor this trend

A weak USD should provide a boost to commodity prices

A weak USD also makes imports more expensive further boosting inflationary pressures

In my view, USD depreciation is a function of political turmoil in DC

Higher short-term rates in the US provide a floor to the USD – don’t expect massive USD depreciation


Commodities:

In a week where news outlets told us that investors once again became fearful of inflationary pressures, commodities did not fare well

I am a bit skeptical that the reason the equity market got clobbered was a realization that inflation was a problem

I still think that inflation risk is underpriced by investors, but the stress in the equity market seems unrelated to commodity prices

 


Investor Risk Aversion:

Our most recent Risk Aversion Index reading returned to the Normal Zone

On a 4 week moving average basis, the reading is still in the Euphoria Zone

Prior weeks readings have been extraordinarily low indicting great investor complacency

 

We expect a risk on/off market in 2018 – Friday might have been the start of more normal risk levels


Chart of the Week:

Inflationary expectations are ratcheting up

Wage growth is the most cited reason, followed by a strong US economy

A weak USD is also at work

 

 

 


What We See This Week:

  • A bit more fear – I see a lot more risk on/off in 2018
  • Further profit taking – I think that investors know that 2017 was a gift from above
  • Taking some money off the table may be a smart move especially given valuation levels
    The money is likely to be deployed in cash, not bonds
  • Continued distaste for bonds as an asset class
  • Some recovery among healthcare stocks in the US – the JP Morgan, Berkshire Hathaway and Amazon venture will take time to crystallize
  • Lots of earnings – big companies reporting( Disney, Gilead, Tesla, Mondelez, GM, Allergan, Humana, Prudential, Cerner, Cummings, …)

Eric J. Weigel

Managing Partner, Global Focus Capital LLC


Services

Asset Management:

  • Tactical Asset Allocation
  • Global Long/Short Equity
  • Sustainable Equity

Consulting

  • Portfolio Reviews/Positioning
  • Risk Management
  • ESG

Research Publications

  • The Asset Allocation Advisor
  • The Equity Observer
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