Following February’s market gyrations, which saw inflation fears exacerbated by the unwinding of ill-fated short-volatility strategies, March promised to be a month of rest and recovery as global growth was plateauing at a high level and the monthly employment report presented a remarkable combination of strong employment growth, higher workforce participation and little sign of wage pressures. In addition, North Korea tensions eased while NAFTA and South Korean trade talks advanced smartly.
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Following January’s equity melt-up, February saw the sharpest equity reversal in seven years as “warmer” economic reports and the enactment of additional fiscal stimulus triggered U.S. inflation fears. The unwinding of various flavors of short volatility strategies—risk parity, commodity trading advisors (CTAs), short volatility exchange traded funds (ETFs), and targeted volatility insurance products—contributed to the speed of the decline, as the VIX (equity volatility index) reached its highest levels since 2015. Global equities fell 4% uniformly across segments; bonds were unable to serve as a portfolio anchor, losing 1%, as it is hard for a hedge to be effective when it is the catalyst for the equity market decline. The dollar ended higher after a volatile month, while weak energy prices weighed on the commodity complex.
Prospects for a further acceleration in economic growth, combined with capital expenditures and corporate earnings supercharged by tax reform, drove outsized market gains in January, as equity investors extrapolated inflation-free above-trend growth into the future. Fixed income investors had a different perspective on inflation, with the increase in yields and fall in price wiping out a full year’s return for many owners of Treasuries. Higher yielding bonds significantly outperformed their investment grade peers. A continued fall in the dollar bifurcated the world bond market and supported commodity prices.
US tax reform legislation, benign US inflation, overseas economic strength and the resulting dollar weakness contributed to a broad-based rally in risk-assets, with Eurozone equities the only significant outlier. The Federal Reserve Board (Fed) did raise rates in December, as expected, but continued curve flattening more than offset any tightening effect on the global economy or financial markets. Emerging market equities, longer-dated fixed income and commodities and commodity-sensitive markets outperformed.
Global equity markets gained 2% in November and continued to bask in the Goldilocks’ moment (year?) of sustained, broad-based, non-inflationary global growth, offering hope that central bankers will not tighten too aggressively. The sudden reality of the year-end passage of the first major tax reform in over 30 years managed to support U.S. equities, while the weak dollar and flattening yield curve cushioned bond market losses, at least at the headline level. The tax bill’s early Christmas present boosted bullish sentiment among investors to 30-year highs.
In this issue:
“A Hedge Fund Primer” by M. Taylor Scott, CFA
“Becoming a non-family director of a family business” by D. Fort Flowers, Jr., CFA
“Putting Legacy 401k Accounts to Good Use” by Andrew B. Smith, JD
Global equity markets edged higher in August, but weak inflation and wage growth, geopolitics and Hurricane Harvey had a dampening effect, causing safe-haven investments such as gold and high-quality bonds to also rally. Listed equities gained less than half a percent, but extended their winning streak to eight months, with performance once again led by…
June saw global equities gain 0.5%, with continued strength in China and other Asian emerging markets, but also a bit of rotation in regions, sectors and styles. Previously hot areas such as technology and Europe saw profittaking, while financial stocks and lower quality stocks outperformed. Central bankers in much of the developed world signaled less…
Global markets remained resilient as positive economic news around the world and encouraging European political developments offset deteriorating optimism in the US about the degree and speed to which tax reform, deregulation and infrastructure spending initiatives will be achieved. Download Issue
While some of the momentum of the post-election reflation trade (betting on a return of inflation) subsided in January, its directionality remained intact, with U.S. equities gaining 2.7% to reach new highs while global bonds continued lower. Perhaps the bigger news was a reversal in the dollar, which was significantly weaker after administration officials suggested…