Stocks & Bonds – Friends Under Duress

Last week again showed why you need both stocks and bonds in your portfolio – when one zigs the other one zags
The search for assets that effectively diversify equity and interest rate risk is key especially given over-valued stocka nd bond markets
Yet another tough week for risky assets with 2 exceptions: Emerging Mkt equities and REITS
The outperformance of EM equities was driven by a bounce back in the Chinese market (up 2.8% last week)
Conservative (bond heavy) multi-asset class strategies outperformed riskier (heavier equity) allocations
YTD lower risk asset allocation strategies have also outperformed especially if the allocations involved international equities
Commodities remained volatile and subject to the direction of oil prices – the trend is increasingly negative
Within equities, US Midcaps outperformed last week with Value stocks trouncing Growth stocks by 1.1% over the last 5 days
A 60/40 mix of purely US assets under-performed last week a global version but remains vastly ahead YTD

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 got pounded due to major uncertainty regarding whether BREXIT will pass Parliament
Theresa May can’t seem to win even when she resolves major uncertainties (Irish border this week, deal with EU)
The Mexican Peso continues its depreciation versus the USD and is firmly in a Down Trend Stage policy
In general, FX volatility has increased substantially in the last couple of months

Commodity indices had a bad week due to the continued downward trend in oil prices
Oil prices dropped 7% last week and are down over 18% over the last 60 days
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 stable last week for a change but barring a real crisis continue on a downtrend especially in light of higher short-term interest rates

Home bias keeps winning as multi-asset strategies with international assets have significantly underperformed
The strong USD is partly to blame but we do not see a significant reversal anytime soon as US monetary policy is being normalized
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
- Tariffs are inflationary and will be reflected in higher consumer prices eventually
EM equities, in particular, are taking a huge hit both on the asset side as well as currency – this is turning out to be a lost year for EM investors
- We still believe that an allocation is warranted
Value dramatically outperformed Growth last week and we are seeing signs of industry rotation toward value sectors
- The Momentum trade while still ahead YTD is quickly losing strength
Q3 reporting is semi-heavy in the US – looking for commentary on tariffs, slowing growth, and inflationary pressures

To read our full weekly report please click here

Eric J. Weigel

Global Focus Capital LLC

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