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
Commodities:
- 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
This Coming Week:
- 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
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