We are convinced that, after the long bull market run, we are now entering a new phase where volatility is going to remain a principal feature and where returns are going to remain suppressed for a long time. What is materially different from the period 2009-2014 is the poisoned combination of higher debt, stretched asset class valuations, higher economic volatility and lower expected effectiveness of central banks’ actions. In our view, this means that the next 3-5 years will be characterized by a framework of lower returns/higher volatility.
The Fed confirmed the end of Quantitative Easing (QE) and changed its rhetoric on the job market. The unemployment rate is (finally) gradually declining, as is the underutilization in the labor market, although it remains high by historical standards. The Kansas Fed LMCI Index shows high momentum and an improving level of job market conditions, but keep in mind that not all labor market metrics have recovered to pre-crisis levels. An improving labor market, together with the fall in oil & gasoline prices and some signals of a pick-up in wages should be supportive for consumer confidence, which is close to seven year highs. Continue reading
Posted in Economy, Equity, Fixed Income, Industry Insights, Markets, Multi Asset
Tagged Capital Markets, economy, Equity, Fed, Fed policy, GDP, markets, QE Tapering, Unemployment, US GDP
_The low-interest-rate environment we’re in has caused many income-seeking investors to “crowd” into the riskier sectors of the bond market in search of higher yields. In doing so, they may pick up higher yield, but will likely take on higher default or credit risk. Although the Fed may not raise rates until the middle of next year, fixed-income spreads – the difference in yield over Treasuries ‑ may continue to grind tighter, causing further crowding. When interest rates rise eventually, the typical ability of credit markets to buffer losses because of their relatively higher yields, will be modest at best, particularly in short-term bonds. A rush to the exits could be ugly. Continue reading
If this isn’t as good as it gets, it’s a lot better than it might have been: the world is swimming in cheap energy, the Eurozone isn’t in recession after all, consumer and business balance sheets are strong and Ebola is yesterday’s story.
In the capital markets last week oil prices fell, stocks rose and bonds did nothing (more details at the end of this post). But the big news in the U.S. concerned the economy, specifically employment statistics. Continue reading
In the recent U.S. mid-term elections, the Republican Party increased its majority in the House of Representatives, regained control of the Senate and padded its majority in local gubernatorial races. With a Republican Congress and a Democratic Executive branch, we envision three paths of political implications going forward: