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: April 13, 2017
Category: Quantitative Insights
Tags: equity, volatility, commodities, sovereign debt, interest rates

Our Observations: Short-term volatility (as measured by 22 days) increased in most assets, but certain stocks assets and metals are approaching their longer-term averages. We think rising volatility along with declining short-term momentum is a relatively strong signal of a bumpy road ahead, especially for risky assets such as stocks and commodities.

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 | April 12, 2017

Author: Nathan J. Rowader
Date: April 12, 2017
Category: Quantitative Insights
Tags: equity, volatility, commodities, sovereign debt, interest rates, correlation, inflation, diversification, trading, trading patterns

Our Observations: Nearly every asset class has experienced an increase in short-term correlation (22 days), and many have risen above their long-term averages. We think this is proof of how interest rate expectations and inflation are driving near-term returns and why it is important to keep an eye on the trading pattern of interest rates. That said, certain stock assets are below long-term correlations. Less rate-sensitive sectors of the market, such as the NASDAQ 100, may add some diversification benefit.

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 | April 11, 2017

Author: Nathan J. Rowader
Date: April 11, 2017
Category: Quantitative Insights
Tags: equity, momentum, market correction, long-term growth, bullish market

Our Observations: Short-term momentum (returns over 22-day period) in stocks, energy, and metals declined over the week. We think this adds more evidence that a slight market correction may be underway. However, long-term momentum is still quite strong, so we still expect only a mild sell-off within a bullish market.

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 | April 10, 2017

Author: Nathan J. Rowader
Date: April 10, 2017
Category: Quantitative Insights
Tags: equity, fixed income, income, momentum, monetary policy, value, volatility

What to Note: The 10-year Treasury Bond bounced off a low rate of 2.34%, which remains inside the recent 2.31% and 2.62% bands.  The rate increased a few basis points, but markets did not rotate into inflationary asset classes like stocks and commodities.  We think it is important to continue to keep an eye on this interest-rate range for further indications of market directions. However, for now there has been no major change.

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Volatility | April 7, 2017

Author: Nathan J. Rowader
Date: April 7, 2017
Category: Quantitative Insights
Tags: equity, value, volatility, commodities, sovereign debt, interest rates, inflation, diversification, momenturm, mean reversion

Our Observations:  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. Currently, near-term volatility (22 days) is below long run (12 months) in nearly every asset class, underscoring what has been a period of investor apathy toward recent developments in monetary and fiscal policy. The combination of low volatility and divergent momentum of returns over the short (22 days) and long term (12 months) periods —as described in the earlier note—may indicate some stress in the market. However, we think the global economy is continuing to grow and should contain any kind of return mean reversion, where assets revert back to their average price.

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Correlation | April 6, 2017

Author: Nathan J. Rowader
Date: April 6, 2017
Category: Quantitative Insights
Tags: equity, value, volatility, commodities, sovereign debt, interest rates, correlation, inflation, diversification

Our Observations: 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. In recent months, we think rate and inflation expectations have been a key driver of all asset class returns. Sovereign debt’s correlation to the overall basket has increased, which is diminishing the diversification benefit of the asset class. This often occurs in an environment where interest rates and inflation are increasing simultaneously. There is currently a similar effect in U.S. and Emerging Market stocks where the impact of the changing rate environment is most evident.

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Momentum | April 5, 2017

Author: Nathan J. Rowader
Date: April 5, 2017
Category: Quantitative Insights
Tags: equity, momentum, monetary policy, value, volatility, commodities, sovereign debt, interest rates

Our Observations: 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. Based on the pink circles in the chart, we think longer term momentum (12-month) is painting a picture that may favor riskier assets such as stocks, energy, and metals. Meanwhile, long-term momentum is currently looking weaker in historically lower-risk assets such as Treasurys and foreign sovereign bonds. However, the bars illustrating near-term momentum (22 days) indicate a mixed picture in equities and commodities. Given the low interest rate environment globally and a generally expanding economy, we believe mixed returns in the risk asset classes may eventually move in the direction of long-term momentum.

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Income Report Card | March 31, 2017

Author: Nathan J. Rowader
Date: April 3, 2017
Category: Quantitative Insights
Tags: equity, fixed income, income, momentum, monetary policy, value, volatility

Our Observations: The 10-year Treasury ended the week exactly where is started: at 2.40%. As a result, most credit-related sectors advanced over the week, finishing with strong positive gains while Treasury and other safety assets were largely flat.

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