A Shot In the Arm
A Shot in the Arm for the Global Economy
The Organization for Economic Cooperation and Development (OECD) hiked its forecast for 2021 global growth to 5.6% from 4.2%. The $1.9 trillion U.S. fiscal stimulus will be a shot in the arm felt around the world. After all, the world is an interdependent place.
The bond Hulk sounded like he (or his firm) had some splain’n to do after a rough start to the performance year. The main strategy’s return of -2.93% reflects the impact of a 40-basis point spike in the 10-year Treasury yield on their above-average-duration portfolio. Never mind the +15.2% return and 700 basis points of alpha generated last year or the 1400 basis points of total outperformance in the last five years. It was a “what have you done for me lately?” moment. The Hulk’s bet on falling interest rates is truly out of consensus. We like it.
“Predicting a peak in long-term rates could prove a fool’s errand. History points to lower rates ahead. An attempt to pick a top in rates has been a tricky business, just as it was in 2013 and again in 2018. Markets can revert quickly. As long-term yields have reached the value zone a neutral or overweight position may very well prove to be the low-risk choice.” The Hulk continued, “It will be easy to be lulled to sleep as markets rise with the distribution of a vaccine and the tailwind of policymakers’ response to economic challenges…Even with these risks, we may be entering what I have called a golden age for credit.”
As Risk Report readers know, when it comes to equities, we take our cues from the credit markets. Let’s hope Hulk is right because today investment-grade indices are providing clear sell signals on short, intermediate, and long-term models.
“The outstanding characteristic of this business cycle is low-interest rates,” said Howard Marks, co-founder, and co-chairman of Oaktree Capital Management. “We are living in a low-return world. There is no easy way to make a good return. An investor has five strategic options:
Invest as you always have and accept the probability of lower returns.
Make your portfolio more defensive and ensure lower returns.
Put everything in cash and generate 0% return [or less after inflation]
Invest in more risky assets for the chance of a higher return [and potentially higher loss]
Look for market segments and managers who are skilled at exploiting the low-return environment. Many times, these strategies are private and illiquid.”
Speaking of interdependence, growth, and shots in the arm, I was honored to have moderated the Global Interdependence Center (GIC) briefing on Tuesday, March 9, titled “Virus Mutations.” Our friend and Advisory Board member David Kotok of Cumberland Advisors concisely summarized the informative panel discussion. You can read David’s reflections here and watch the one-hour webinar replay here.
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Benchmarks and indices are presented herein for illustrative and comparative purposes only. Such benchmarks and indices may not be available for direct investment, may be unmanaged, assume reinvestment of income, do not reflect the impact of any trading commissions and costs, management or performance fees, and have limitations when used for comparison or other purposes because they, among other things, may have different strategies, volatility, credit, or other material characteristics (such as limitations on the number and types of securities or instruments) than RiskBridge account. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark or index. We make no representations that any benchmark or index is an appropriate measure for comparison. Please see below for brief descriptions of some of the major indices mentioned in this material:
The S&P 500® Index is a market capitalization-weighted index of 500 of the largest U.S. companies, designed to measure broad U.S. equity performance.
The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States.
The Core Personal Consumption Expenditure Price Index provides a measure of people's prices for domestic purchases of goods and services, excluding food and energy prices. The core PCE is the Fed's preferred inflation measure.
The Cboe Volatility Index (VIX) is a real-time market index representing the market's expectation of 30-day forward-looking volatility. Also known as the "Fear Index, it is used as a way to measure market risk.
The ICE BoA MOVE Index is a well-recognized indicator of U.S. interest rate volatility and bond market sentiment that measures the implied yield volatility of a basket of one-month over-the-counter options on 2-year, 5-year, 10-year, and 30-year Treasuries.
The Merrill Lynch 10-year U.S. Treasury Futures Total Return Index measures the performance of a fully collateralized rolling 10-year U.S. Treasury futures position.