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Mission Accomplished (Updated 2018) - Q1 2018 Market Commentary


  • The beginning of the quarter saw a euphoric start for global equities as investors celebrated the passage of the Republican tax plan that lowered the tax burden for U.S. corporations.
  • However, the market regime abruptly shifted following the January employment release at month-end.  Investors were spooked over the rising wages component that sparked initial inflation fears.
  • At the end of January, we argued that investors had front-loaded about half their annual performance but that assumed no change to the underlying risk regime which abruptly shifted.
  • In March, more signs of market stress emerged as a key corporate funding signal (LIBOR-OIS spread) rose to levels not seen since 2009.
  • The removal of the Fed Put along with an elevated interest rate environment and uncertainty arising over fiscal and trade deficits have produced a new risk regime resulting in higher risk premiums being demanded by investors.

Data Source: Bloomberg

Source: istockphoto.com

It is not often (and, in fact, extremely rare) that our writings concerning market inflection points happen to coincide with the actual inflection points. An old southern saying states that even a blind squirrel finds an acorn every now and then, and this 'blind squirrel' has had the fortune of finding several acorns over the past two years.

The first acorn we found occurred in February 2016, when we wrote that at an 800+ basis point spread above risk-free Treasuries, high yield bonds presented a compelling buying opportunity, since such extreme spread levels have generally produced positive forward returns. Sure enough (actually, we were a little unsure at the time as oil prices had plummeted to the mid-$20/barrel range), the market bottomed right around the time we published that piece, and the high yield market has rallied with the Bloomberg/Barclays High Yield spread dropping to as low as 2.9% in late October of last year before rising to 3.45% at the end of 1Q2018 (Figure 1). Since we published that piece, the Bloomberg/Barclays High Yield Index has returned a cumulative 30.1% through 3/31/2018.

Figure 1 - It's Been a Nice Ride for High Yield Investors from the Panic-Stricken 800+ Spread Levels Reached in early 2016 (High Yield Spreads Through 3/31/2018)

A more recent acorn we stumbled upon occurred in our March 10, 2018 blog post celebrating the anniversary of the current bull market (hopefully, this continues as an annual exercise). In the piece, we sounded a cautionary note that investors appeared to be overcrowded in U.S. large cap technology, justified by strong cycle-high profitability, but whose valuations also surpassed prior levels, especially when viewed against small cap value, an 'undercrowded' trade to say the least. For now, it appears that 'technology', as proxied by the Nasdaq 100, is succumbing to some self-inflected wounds (the

This article was written by

Benjamin M. Lavine, Co-Chief Investment Officer at 3D/L Capital Management, is an investment professional with 20 years of experience in asset management and institutional consulting. Ben brings a versatile investment background and knowledge set having served as a portfolio manager on the developed markets equity team at Batterymarch Financial Management and as a vice president in the Funds Management Division at Wilshire Associates. Ben brings expertise in the following areas: Global Quantitative Equity Research and Management, Macro Investment Strategy, Institutional Product Management and Development, and Institutional Consulting and Public Markets Fund-of-Funds Ben received his MBA from UCLA’s Anderson School of Management, holds the CFA designation, and has experience working on data platforms including Bloomberg, Factset, MATLAB, Orion Technologies, and Thomson/Reuters.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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