Category: Chart of the Week

What Should We Expect From an Oil Rebound?

Over the past 18 months oil has been a significant drag on global financial markets. While oil producing countries have obviously been hit the hardest, the rest of the world has also struggled. But recently there’s been a mild resurgence in oil, with the WTI index now near $50 per barrel.

Over the past 18 months, oil has been a significant drag on global financial markets. While oil producing countries have obviously been hit the hardest, the rest of the world has also struggled. But recently there’s been a mild resurgence in oil, with the WTI index now near $50 per barrel. This is still nowhere near its previous levels of over $100, but it is a significant increase from the low of about $26 seen earlier this year. This Chart of the Week examines what this means for different parts of the world by looking at the daily correlations between oil and MSCI countries’ indices over the past 18 months.

Not surprisingly, emerging markets, along with Canada, have the highest correlations due to their heavy dependence on oil exports. They’ve also had the worst performance over the past few years but stand to gain the most from rising oil prices. Developed markets though also have high correlations and even in the U.S. and Japan, which have the least significant correlations, oil is still a major factor. These correlations won’t necessarily hold up going forward, but the trend suggests that if oil continues its slow recovery financial markets will benefit across the board. While other issues may affect this recovery, such as a “Brexit” or Japan’s deflationary pressures, overall rising oil prices should be a boost to the global economy.

Can Brazil (Pole) Vault Its Way Out of a Floundering Economy?

While the Olympic Games certainly impact a host country’s balance sheet, what about their impact on the local stock market? What do local businesses have to gain from the massive influx of tourism spending and how can we expect this to impact Brazil for the coming games?

While the Olympic Games certainly impact a host country’s balance sheet, what about their impact on the local stock market? What do local businesses have to gain from the massive influx of tourism spending and how can we expect this to impact Brazil for the coming games?

Charted above is the calendar year performance of a hosting country’s local stock market index for the year in which it hosted the summer games. Two outliers are noticeably apparent: South Korea during its dramatic economic growth period and China during the recent financial crisis. Omitting these given their extenuating economic circumstances, the average performance at year-end is about +12%. While this sample size is much too small from which conclusions can be derived, there may be validity to the thought that the short-term net economic impact of hosting the Olympics is a positive one.

Brazil is expecting an influx of 500,000 tourists for the games, and oftentimes a tourist visiting specifically for the Olympics is likely to spend more money than the typical tourist. For example, in London during the 2012 games, an Olympic-specific tourist spent £1,290 vs. £650 of the commonplace tourist. With Brazil in its worst recession since the 1930s, the country needs as much of the Olympic stimulus that it can get. Unfortunately, Brazil is facing a staggering number of hurdles blocking it from attracting the tourists it desires. Bad press surrounding the mistreatment of local citizens, the Zika virus hotbed, and an unfinished Olympic infrastructure may keep the big spenders away. Managing a successful experience for the athletes and at-home viewers, let alone extracting economic benefit from tourists, may require too much of a Herculean effort for the struggling country. Either way, though, the short-term stock returns from Brazil will reflect the success – or lack thereof – of the country’s Olympic hosting prowess.

Are Real Estate Returns Headed for a Correction?

Core real estate investments have flourished since the financial crisis, with the NCREIF Property Index (“NPI”) returning 13.3% in 2015, its sixth consecutive yearly gain after the real estate recovery began in 2010. Not surprisingly, investors are now wondering if this run can continue, or if it is time to pull back on their allocations to real estate.


Core real estate investments have flourished since the financial crisis, with the NCREIF Property Index1 (“NPI”) returning 13.3% in 2015, its sixth consecutive yearly gain after the real estate recovery began in 2010. Not surprisingly, investors are now wondering if this run can continue, or if it is time to pull back on their allocations to real estate. In this week’s chart, we look at the historical total returns of the NPI going back to 19782 broken out by appreciation and income. The NPI was first launched in 1978, and since then, real estate cycles have historically lasted more than 10 years. The first cycle featured 13 years of positive total returns followed by a negative 5.6% return in 1991 as a result of severe oversupply in the market. These negative returns only lasted two years before again turning positive from 1993 until 2008, when returns flipped negative due to the global financial crises.

Since the Global Financial Crisis, core real estate has made a robust recovery, generating double-digit returns over the past six years, but the real question is whether or not such impressive returns can continue. On one hand, supply for most commercial real estate sectors is still below their pre-recession averages, cap rates may compress further given their spread to Treasuries, income levels are favorable, leverage is manageable, and debt maturity profiles are appropriately structured. On the other hand, valuation levels are high as a result of price appreciation, and significant capital has flowed into the asset class. Ultimately, we do not believe that real estate returns are poised for a correction, but anticipate they will retreat from the double-digit territory we have seen over the past six years to a more realistic mid- to high-single-digit range.

 

1The NCREIF Property Index measures the return of individual commercial real estate properties that are acquired in the private market for investment purposes only.

2Inception year of the NCREIF Property Index was 1978

UK: Should I Stay or Should I Go?

This week’s chart looks at polling information for the UK Referendum scheduled on June 23rd. On that day voters will decide whether or not to remain in the European Union.

This week’s chart looks at polling information for the UK Referendum scheduled on June 23rd. On that day voters will decide whether or not to remain in the European Union. Taking inspiration from last year’s “Grexit”, the market has appropriately named this potential event as the “Brexit.” The chart shows a Bloomberg composite indicator which takes an average of polling data from several surveys. The most recent results report 41% in favor of remaining, 40% in favor of leaving, and 19% undecided, suggesting a very close vote. The odds-makers, however, place the chance of the “Brexit” around 35%. In terms of economic consequences, it is hard to predict exactly what would happen should the “Brexit” occur, but in general, investors can expect to see a weaker pound, reduced business investment, and weaker economic growth with some spillover effects to the Eurozone. This is an event worth watching as it will likely have some influence on short-term market performance leading into the summer.

A Continued Shift from Active to Passive in U.S. Equities

This week’s Chart of the Week examines the ongoing shift from actively managed to passively managed U.S. equity allocations. While active investing has historically been the predominant form of portfolio management, investors are increasingly recognizing that passive strategies are an efficient manner of capturing market beta.

This week’s chart examines the ongoing shift from actively managed to passively managed U.S. equity allocations. While active investing has historically been the predominant form of portfolio management, investors are increasingly recognizing that passive strategies are an efficient manner of capturing market beta. Within U.S. equities, the theme of fund flows migrating from active to passive has been dramatic over the past several years. Since 2007, passive strategies benefited from consistent fund inflows while active strategies continually dealt with fund outflows. With the exception of 2013, actively managed U.S. equity strategies saw net fund outflows over every calendar year since 2007. This trend continued during the first quarter of 2016 with outflows from actively managed U.S. equity strategies totaling $44.7 billion and flows of passively managed strategies gaining $27.1 billion.

Investors often view U.S. equities as an efficient asset class for which the case for passive management is the most compelling. Based on fund managers’ stated prospectus benchmarks, only 21% of large-cap U.S. equity funds who benchmark against the Russell 1000 index outperformed their index over a trailing 10-year period. Within small-cap where informational inefficiencies are greater, 52% of funds who benchmark against the Russell 2000 index outperformed their index over a trailing 10-year period. Given that the majority of actively managed funds often underperform their stated benchmarks and charge higher fees in the process, it should come as no surprise that investors are gravitating toward passively managed funds. While active managers who can generate excess returns over time are certainly desirable, identifying those consistent generators of alpha can be quite challenging, especially for efficient markets like U.S. large-cap equities.

Any Good Deals Out There in the U.S. Equity Market?

Given the current market environment right now, there are no real compelling “buy” opportunities, as measured by a variety of valuation metrics. On top of that, economic growth is slow, yields are low, and equity returns are weak. As such, one of the primary conversations we have with clients is around rebalancing, both at the broader asset class as well as between the underlying components of each asset class.

Given the current market environment, there are no real compelling “buy” opportunities as measured by a variety of valuation metrics. On top of that, economic growth is slow, yields are low, and equity returns are weak. As such, one of the primary conversations we have with clients is around rebalancing, both at the broader asset class as well as between the underlying components of each asset class. In particular, we have recently spent a lot of time discussing the relative valuations of large-cap and small-cap U.S. equities in an effort to identify the more attractive opportunity in today’s market.

In this week’s chart, we examine the P/E ratios of U.S. large-cap and small-cap stocks and compare today’s values to their 20-year averages, removing outliers for when earnings are near zero or negative. The intuition is that the farther today’s P/E ratio is from the long-term average, the more (or less) attractive it is from a valuation standpoint: a reading below the long-term average signals a discounted price, whereas a reading above the long-term average indicates the index is expensive. As seen in the chart, both are near their historical averages, suggesting there isn’t an overly compelling case for either.

How they have gotten to this point over the last 2–3 years, though, is very different. Large-cap companies have slowly returned to this average as a result of investor caution as well as the gradual — but consistent — rise in earnings from 2011 to 2015. Recently though, earnings have slightly fallen for larger companies, which has caused some concern for investors. Small-cap stocks, on the other hand, feature more volatile valuations, with swings in earnings the primary explanation of volatility. In theory, during times of “risk-off” sentiment, large-cap stocks should outperform smaller companies, and vice versa for “risk-on” periods. But with ambiguous market data and valuations so similar to historical averages, investor sentiment is unclear, thus making it extremely difficult to truly identify compelling value in either sleeve of the U.S. equity market.

Could Delinquent Student Loans Slow the Economy in the Coming Years?

This week’s chart of the week looks at delinquent balances by loan type from 2003 through 2015. In general, total loan delinquencies – auto, mortgage, student and credit card – remain subdued compared to their levels between 2007 and 2012.

This week’s chart of the week looks at delinquent balances by loan type from 2003 through 2015. In general, total loan delinquencies — auto, mortgage, student, and credit card — remain subdued compared to their levels between 2007 and 2012. However, one area of concern is the significant increase in delinquent student loans, which has increased 97% since 2008. Although they constitute a relatively small percentage of total delinquent loans, they could have negative ramifications for years, as current or former students attempt to pay down their debt and thus have less money to consume on other items, not to mention their damaged credit score could affect their abilities to obtain mortgages and other financing for large ticket items in the future. So while the current level of student debt may not be an immediate threat to the economy, it could create economic headwinds in future years.

Will the Emerging Market Equity Rally Continue?

For this week’s chart of the week we take a look at the year to date return stream of emerging market equities, as measured by the MSCI Emerging Markets (“EM”) Index, which has been on a wild ride as oil prices fluctuated over the first three months of the year.

For this week’s chart, we look at the year-to-date return stream of emerging market equities, as measured by the MSCI Emerging Markets (“EM”) Index, which has been on a wild ride as oil prices fluctuated over the first three months of the year.

After reaching their 2016 low in the middle of January, emerging markets embarked on a sharp rally in the second half of February that continued through March and early April. On February 10th, due to concerns about the impact of a further rate hike on both domestic and foreign economies, Federal Reserve Chair Janet Yellen signaled postponement on the March rate hikes. The postponed rate hike decision coupled with continued weakness of the dollar and stabilization of commodities led to the rally starting on February 12th.

Earlier this week, China released positive upbeat news, announcing its exports rose 11.5% compared to a year earlier and surpassing analyst expectations which led to a strong April start for emerging market equities. As volatile as this first quarter of 2016 was, we frequently remind clients of the importance of having a long-term approach to investing as we have seen the EM index swing from significantly negative in January to +6.7% year to date as of April 13th. Certainly, EM investments will demonstrate elevated volatility across market cycles, but it is critical to maintain a long-term focus on their performance as it relates to total portfolio returns.

Growth vs. Value: What Does Technical Analysis Tell Us?

Technical analysis enables speculators to make future market predictions based solely upon a charted historical past; the actions of the market are studied as opposed to the underlying fundamentals of a company. Analysts have studied these sorts of charts for years and in the process discovered trends that are believed to support specific future behavior. One of these trends is explored in this week’s chart as it applies to the market’s preference of style: value vs. growth.

Technical analysis enables speculators to make future market predictions based solely upon a charted historical past; the actions of the market are studied as opposed to the underlying fundamentals of a company. Analysts have studied these sorts of charts for years and in the process discovered trends that are believed to support specific future behavior. One of these trends is explored in this week’s chart as it applies to the market’s preference of style: value vs. growth.

Typically, these trends are applied to a single stock’s movement, but for the sake of assessing the future return prospects of value and growth, we will apply them to the Russell 3000 Value and Russell 3000 Growth indices. More specifically, we calculate the return differential between the two indices by subtracting the Russell 3000 Growth index from the Russell 3000 Value index. This differential is smoothed by using a 90-day moving average and indicates value’s outperformance versus growth when above 0. The 200-day moving average is used as an alarm to changing trends; if a stock price, or in our case a shorter period moving average, breaks upwards through the 200-day moving average, this is seen as a bullish sign, or in our case the outperformance of value over growth. The opposite can be said if our differential breaks through this line downwards. As pictured, value broke through its 200-day moving average line in November, suggesting its future outperformance over growth, which it has recently delivered.

Bollinger Bands, portrayed in green and blue, represent 2 standard deviations above and below the 200-day moving average. It is generally thought that breaking this upper band signifies the security is overbought, which in our case would suggest a trend reversal in growth’s favor and that perhaps, value’s brief period of outperformance is over. With sectors like Healthcare and Tech rallying lately — up 1.3% and 0.9% respectively in March — growth may truly be back in fashion. Given the oscillating nature of the differential, however, this may be a true case of ambiguity in which value and growth have yet to battle it out.

Reputational Risks and Takeaways for Investors

This week’s Chart of the Week examines the aftermath of three recent corporate scandals. 

This week’s Chart of the Week examines the aftermath of three recent corporate scandals.

On August 15, 2015, The New York Times released an expose of the work environment at internet retail giant Amazon, describing a cut-throat work environment where employees were pushed to their limits. The company’s stock price sharply dropped in the weeks following the article, but has since recovered and continued to rise. Amazon’s buoyancy can be attributed to its established presence among consumers, lack of direct competitors, and the absence of legal/financial ramifications following the article.

On September 18, 2015, the Environmental Protection Agency (EPA) issued a Notice of Violation of the Clean Air Act to Volkswagen (VW) alleging that the automaker used software to deliberately evade clean air standards in certain diesel cars. The Department of Justice (DOJ) is suing VW for up to $46 billion, and the automaker must provide a solution for the nearly 600,000 cars affected by April 21, 2016. VW stock fell 65% immediately following the EPA announcement and has seen a feeble recovery since.

On September 28, 2015, legislators called for a subpoena of Wall Street favorite Valeant Pharmaceuticals in response to concerns about inflated drug prices. Shares immediately fell 16%, a trend that continued as investigators uncovered that Valeant’s serial acquisition strategy was buoyed by questionable accounting practices and unfounded price hikes. In the six months following, Valeant stock fell nearly 90% – from a high of $262 on August 5, 2015, to a low of $27 by March 18, 2016.

Investor Takeaway: Some companies are more resilient against reputational damage than others. Investors often do not have access to all the information, and seemingly profitable companies may stand on shaky foundations. It is important to distribute assets across many stocks to ensure that the reputational risk of any one firm cannot cause dramatic effects. In other words, holding diversified portfolios of securities can help insulate investors from the effects of single stock volatility emanating from corporate scandals.