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.

RECENT ACTIVITY

Volatility | June 8, 2017

Author: Nathan J. Rowader
Date: June 8, 2017
Category: Quantitative Insights
Tags: volatility, rates, bonds, stocks, returns

Volatility remains low in nearly every asset class except for commodities. Without any big shift in stock or bond volatility, we expect the current trends to persist.

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 7, 2017

Author: Nathan J. Rowader
Date: June 7, 2017
Category: Quantitative Insights
Tags: volatility, commodities, correlation, bonds, stocks, trends

Correlation between stocks and bonds the increased, as a result of the similar direction of performance. The positive correlation between these two asset classes persists, indicating that rates are still a strong driver of returns.

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 6, 2017

Author: Nathan J. Rowader
Date: June 6, 2017
Category: Quantitative Insights
Tags: momentum, interest rates, inflation, bonds, stocks

Our Observations: Interest rates in Europe and the U.S. declined last week, driving up the price of bonds. However, this coincided with fairly strong stock performance. Long-term momentum still favors stocks over bonds, so we think the year’s positive stock market performance should continue.

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 5, 2017

Author: Nathan J. Rowader
Date: June 5, 2017
Category: Quantitative Insights
Tags: volatility, sovereign debt, Treasurys, currencies, rates, safety

Our Observations: The 10-year Treasury ended the week at 2.21%, within the new lower range of 2.20% and 2.30%. The drop in global rates is helping push sovereign bonds higher and keeping them competitive in terms of performance. We think this is an important trend worth watching as the current rate of sovereign bonds doesn’t warrant such strong performance and may indicate a preference for safety in bond portfolios.

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Volatility | June 2, 2017

Author: Nathan J. Rowader
Date: June 2, 2017
Category: Quantitative Insights
Tags: risk, currencies, bonds, low volatility, Brazil, emerging markets, stocks, volatilty

Our Observations: Brazil stocks and currencies are the biggest movers with a sharp increase in volatility. All other volatility changes were nominal with relatively low overall global volatility separate from Brazil. This is supportive of Brazil’s problems as an isolated incident and shouldn’t spread to other countries.

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 1, 2017

Author: Nathan J. Rowader
Date: June 1, 2017
Category: Quantitative Insights
Tags: correlation, currencies, equities, bonds, Brazil, portfolio risk

Our Observations: Brazil’s sharp decline is the top story for correlation. The change in correlation did not spread to other emerging markets or risk assets, supporting the idea that the problems in Brazil are not a systemic issue for Emerging Markets as a whole.

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 | May 31, 2017

Author: Nathan J. Rowader
Date: May 31, 2017
Category: Quantitative Insights
Tags: momentum, inflation, currencies, sell-off, Brazil, emerging markets, stocks

Our Observations: The big story in momentum is Brazil, as political turmoil and fears of military mobilization weigh heavily on stocks and currency. However, this does appear to be isolated, as the rest of the emerging markets and Europe continue to exhibit strong short- and long-term momentum, while bonds continue to show weakness, especially at the long end.

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 | May 30, 2017

Author: Nathan J. Rowader
Date: May 30, 2017
Category: Quantitative Insights
Tags: volatility, Treasurys, currencies, rates, U.S corporates, high yield munis, lower credit spreads, tax-reform

The 10-year Treasury finished the week at 2.25%, inside what appears to be a new and lower trading range of 2.20% and 2.30%. The report card is again showing a decline in rating for U.S. corporate high yield bonds, and high yield municipal bonds are moving into their top spot. Given the low credit spreads for all corporate bonds, we think the muni market is looking attractive — particularly because any major tax reform legislation is likely in waiting, perhaps for an extended period of time.

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