Quantitative Insights

To understand the impact of catalytic narrative forces, we have to monitor the vital signs of the capital markets they affect. To analyze the big picture through the lenses of game theory and history, we must also examine the details through lenses like volatility, momentum, income, correlation and inflation. These are the indicators of systemic vitality and stress—the fine details we use to fine-tune our worldview. We hope they help you sharpen your understanding of the investable universe.

Author: Nathan J. Rowader
Date: June 27, 2017
Category: Quantitative Insights
Tags: momentum, interest rates, bonds, stocks, sideways market

Our Observations: Short-term momentum for stocks and bonds is close to 0 (zero) in many markets, which is consistent with a market grinding sideways. We think it is important to keep an eye on changes to short-term momentum for an indication of future direction.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

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Author: Nathan J. Rowader
Date: June 26, 2017
Category: Quantitative Insights
Tags: interest rates, Treasurys, bonds, yield, cash

Our Observations: The 10-year treasury yield ended the week at 2.15%, a 1 basis point change over the week. We see the increase in short-term rates standing out, as the scorecard’s cash proxy has nearly doubled its yield in the last year while all other yield options have experienced lower yields. At some point, we think cash may be a potential opportunity for growth which could put major pressure on all other parts of the bond market.

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Volatility | June 22, 2017

Author: Nathan J. Rowader
Date: June 22, 2017
Category: Quantitative Insights
Tags: volatility, bull market, tech, market stress, growth, valuations

Volatility among tech companies has exceeded its long levels, following a period of stress on that segment of the market. These types of steep increases in risk aren’t unusual for tech bull markets since the market is expecting extremely elevated levels of growth to justify valuations. However, this is typically a bad sign for near-term returns so we think it is worth monitoring.

Market volatility is an indicator of financial stress. Low- or declining-volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

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Correlation | June 21, 2017

Author: Nathan J. Rowader
Date: June 21, 2017
Category: Quantitative Insights
Tags: correlation, diversification, stocks, U.S. debt, EM bonds, U.S. bonds, average

Our Observations: U.S. debt has had below-average correlations for much of the year; we believe this provides one of the few diversifying safe havens in the global markets.  Meanwhile, developed foreign bond and EM bonds are near their long-run averages and therefore not as compelling as U.S. bonds in terms of diversification.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

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Momentum | June 20, 2017

Author: Nathan J. Rowader
Date: June 20, 2017
Category: Quantitative Insights
Tags: momentum, commodities, interest rates, stocks, FOMC, deflation

Our Observations: Commodities continue to be under pressure. The Federal Open Market Committee (FOMC) indicated in its recent announcement that inflation was expected to fall below the targeted 2%, creating deflationary pressures throughout the global market. While this may have a negative impact on commodities, it has not translated into bad news for stocks, which essentially moved sideways this past week.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

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Income Report Card | June 19, 2017

Author: Nathan J. Rowader
Date: June 19, 2017
Category: Quantitative Insights
Tags: interest rates, yield, inflation rates, FOMC, rate hikes

Our Observations: The 10-year Treasury ended the week at 2.16, just 2 bps off its YTD low. Yields dropped after the Federal Open Market Committee (FOMC) announced another 0.25% increase to the benchmark rate. As part of the announcement, the FOMC indicated that it expected low levels of inflation, which dampens the expectation for future rate hikes.

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Volatility | June 15, 2017

Author: Nathan J. Rowader
Date: June 15, 2017
Category: Quantitative Insights
Tags: volatility, correction, rates, bonds, risk assets, stocks

Our Observations: Current volatility is approaching the long-term volatility numbers, based on a combination of slightly higher near-term risks and a long period of overall low levels of risk. This is notable as it could indicate a potential for a correction. However, the current level of risk is still far from historical averages and this tends to support a continued preference for risk assets like stocks. Therefore, we believe it is unlikely that we will experience any major correction in the near term.

Market volatility is an indicator of financial stress. Low or declining volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

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Correlation | June 14, 2017

Author: Nathan J. Rowader
Date: June 14, 2017
Category: Quantitative Insights
Tags: monetary policy, volatility, correlation, bonds, stocks, U.K., fiscal policy, currency

Our Observations: Correlations continue to increase in most asset classes, diminishing the diversification benefit of a cross-asset class portfolio. We think much of this can be attributed to the push and pull of fiscal and monetary policies and the related impacts on currency, rates and economic growth. This is a change from the prior several weeks which saw a decrease in correlation for bonds, which indicated a stronger impact from fiscal policy. However, we think the U.K. elections and continued political uncertainty in the U.S. shifted the focus to some degree back to monetary policy.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

See the data