Investors Finding Reasons to Stick with Stocks
The U.S. equity market continues to move higher, with gains often coming at a slow, almost grinding pace. Investors are increasingly being drawn to stocks due to a number of developments:
Better-than-expected corporate earnings growth. More than 90 percent of the firms in the S&P 500 index have posted quarterly results this season, with 78 percent beating profit estimates and 56 percent topping sales estimates.
Improving economic data. Stronger-than-expected job growth and other recent employment data have boosted investors’ confidence about the economy’s health.
Optimism about global monetary policy. In general, investors believe that central banks around the globe may continue to take steps that support further economic growth. Such steps could include maintaining low interest rates and implementing additional rounds of monetary easing.
GAIN: Active Asset Allocation
U.S. stocks were generally flat for the week, with a slight preference towards value stocks. International equity market returns were much stronger, however, with China in particular leading emerging markets higher on signs of improving economic conditions. Since 2012, emerging markets (and international markets overall) have struggled to keep pace with the U.S. We have recently increased our allocation to emerging markets and will consider increasing that allocation further if recent performance continues.
Bond prices rose modestly as global demand for U.S. bonds, which offer attractive yields compared to other sovereign debt, remained relatively strong. Light volume and minimal data announcements led to slow markets. Corporate bonds remain strong, and we continue to emphasize corporates over Treasury bonds in the portfolios.
PROTECT: Risk Assist
As stocks continue to slowly gain ground, market volatility continues to hover at exceptionally low historical levels. The CBOE Volatility Index (VIX), which measures expected future levels of volatility, now sits at around 11.5 (versus its all-time low of 10.3 in July 2014 and its average over the past 5 years of 17.2).
This low volatility is being driven by a combination of low trading volume, economic and earnings results that are in line with expectations, and a lack of external news or events to significantly impact the markets. That said, we believe that volatility could begin to rise soon due to a combination of positioning and central bank events later this month and into September.
Risk Assist is positioned for slightly higher but still subdued volatility as we enter the second half of August and early September.
SPEND: Real Spend
Real Spend model portfolios have benefited recently from their exposure to international markets, which have outpaced the U.S. market during both the past week and month. Meanwhile, the broad asset class diversification in the portfolios helps reduce risk even in what is already a low volatility environment.
Realized volatility in the equity markets continues to be low by historical standards, while realized volatility in the fixed-income markets remains roughly in line with its longer-term range. Given those conditions, Real Spend’s equity positions have been less volatile over the past two weeks than they have been over the past month, while the fixed income positions remain slightly more volatile over the past two weeks than they have been over the past month.