Highlights of the Prior Week
Domestic equity markets worked their way higher last week but only modestly so as political concerns related to the debt ceiling (the President seemingly willing to shut down the government while everyone else involved is saying there is no doubt a deal will get done), Gary Cohn’s (now off the table) resignation threat, doubling down on military efforts in Afghanistan and anything else you can think of seemed to weigh heavy. There was optimism though that tax reform could start to move forward. The Dow Jones Industrial Average gained 0.67%, the S&P 500 added 0.74%, the NASDAQ moved ahead 0.78% and the Russell 2000 was up 1.42%.
One of the highlights of the week was Janet Yellen’s speech at the annual Fed Symposium at the Jackson Lake Lodge in Grand Tetons National Park (more on the National Park Service below). Would she be hawkish or dovish, what clues would she give despite the topic of her speech having nothing to do with FOMC policy (it was more of a history lesson of measures taken during the Financial Crisis)? The market apparently took the entire episode as dovish as rates went lower, the yield on the Ten Year US Treasury Note dropped to 2.16% perhaps also nudged down by a weak durable goods number, and the CME Countdown to Fed showed a rate hike this year to be even less likely. Bloomberg took the speech as Yellen distancing herself from President Trump, not that she would turn down a reappointment but either way she is unlikely view things the way Trump does and if he wants a yes-Chair, he may need to find someone else.
Just about everyone knows the ongoing concern that domestic equity valuations are too high (even if you disagree, you know about it). One common justification for “high” valuations that you have no doubt also heard is that low interest rates allow more room for higher valuations because low rates mean fixed income valuations are stretched which alters the equity risk premium. Mark Yusko from Morgan Creek Capital says otherwise. Low interest rates, he says, are a sign of diminished growth expectations which is hard to argue with in the current environment looking back a few years and looking forward. If growth expectations are diminished then so too should corporate earnings growth expectations be diminished and if that is true then low interest rates should mean equity valuations should be lower not higher which, finishing the thought makes today’s relatively high valuations even more problematic.
And for the astrology portion of our review we consider the problems that have historically befallen markets in the second half of years ending in 7. In the eleven instances from 1907 to 2007 there were six times where the market endured a drawdown of 20% or more. A seventh instance precipitated the Financial Crisis (2007 wasn’t that bad of a year, it was 2008 that was the doozy). This is significant for the future unless of course it turns out that it is not which is to say that these sorts of “indicators” are not a reason to abandon investment process by trying to outguess a decline that may or may not ever come (in the next four months anyway).
VelocityShares launched two ETNs that track LIBOR (one is long the LIBOR and the other is inverse exposure). As exchange traded notes they are debt obligations of Citigroup. As tricky as you might think something like this would be, ETF.com reports they’re even trickier than that. There will no doubt be a learning curve to figuring out how to use them but what caught our attention was that part of the motivation for listing them was perceived demand for tools that can be used to manage interest rate risks. As lower for longer becomes more plausible, the need for hedging becomes more important regardless of whether the LIBOR ETPs make any sense or not.
As a bonus ETF tidbit, AQR Capital Management might be getting into the ETF business.
Nassim Taleb posted The Logic of Risk Taking at medium.com. It is far more understandable that his Facebook posts and Tweets but not as understandable as Fooled by Randomness or The Black Swan (sorry Nassim, it’s true).
Now, when you read material by finance professors, finance gurus or your local bank making investment recommendations based on the long term returns of the market, beware. Even if their forecast were true (it isn’t), no person can get the returns of the market unless he has infinite pockets and no uncle points. The are conflating ensemble probability and time probability. If the investor has to eventually reduce his exposure because of losses, or because of retirement, or because he remarried his neighbor’s wife, or because he changed his mind about life, his returns will be divorced from those of the market, period.
In honor of the 101st anniversary of the National Park Service;100 Incredible Adventures In Our National Parks.
The National Parks Service was created by Congress on August 25, 1916, 44 years after Ulysses S. Grant signed the law making Yellowstone America’s first national park. Part of the Department of the Interior, the mandate of the National Parks Service is to protect areas under management while facilitating public experiences of these areas, a balancing act indeed. We can all agree that national parks can be a bit crowded during the summer months, and there’s no doubt they will be crowded this summer, but with 84 million acres, there must be ways to avoid the crowds. We have a few ideas…
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any companwhose stock is mentioned in this article.