The following is a brief, hopefully easy to understand, explanation of where global markets presently stand. You will also find what we are doing within our clients' portfolios to help create security for our clients and help keep them on track to achieve their goals.
- Presently, we are in SECTOR 4, which indicates slowing growth and slowing inflation.
- Our asset allocations are overweighting treasuries, value-oriented stocks, and investment grade bonds (BBB and above).
- We are underweighting high-risk areas such as energy, technology, and high-yield bonds.
- Why? The global economy has been slowing for the past twelve months. The U.S. is starting to show weakening economic indicators. For example, we have increasing wage inflation, falling earnings, and the Federal Reserve indicates a dovish (negative) view on the economy.
Market Trends–Risk Management
In my opinion, the Rate of Change is the most important factor to look at when reading a chart.
The Rate of Change (ROC) is a forward-looking indicator. Based on price, volume, and volatility, the ROC is one of a handful of indicators we consider when determining our Risk On/Risk Off approach to asset allocation. Risk On can indicate a higher risk level is appropriate, while Risk Off signals a more conservative approach.
When looking at the S&P 500, the ROC is in a downward trend. Once the ROC line goes below zero, we compare it to other indicators to determine our asset allocation. This move has our attention.
Credit Spreads are Widening
When the 10-year Treasury and high-yield bonds within the same 10-year maturity start to go in opposite directions, it can indicate Risk On or Risk Off approach. In this chart we see the 10-year Treasury (black line) rising and the high-yield bond (red line) falling. To us, this indicates a Risk Off environment. The ROC is rising in favor of the 10-year Treasury.
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