[Market Madness] Edition 0058
Losing Steam
Some housekeeping
Well folks, the U.S. indices opened in the red today, putting a pause on the run we’ve seen last week and into this week. The selloff appears to be coming off news that Europe’s economic rebound is not shaping out to be like investors had hoped, bringing down indices in Europe and trickling into the U.S. this morning. In the late morning, the NASDAQ broke trend and turned positive, continuing to add to its all-time high. By the end of the day, we saw a lot of the same. Most indices closed red, and the NASDAQ surpassed 10,000 at its peak in the afternoon but closed just shy of that new all-time high.
The WHO held a press conference yesterday that relieved some worries about COVID 19’s ability to spread through asymptomatic people, and sparked other worries about the rising case levels amid re-opening plans, suggesting that globally, things are getting worse.
The FOMC is set to kick off their meeting today and into tomorrow with a rate decision to come at the end of the meeting tomorrow. Like I said yesterday, the market is pricing in no change to rates, but eagerly awaiting what comes from the press conference. The Fed has two main mechanisms about which they can influence rates and thus the economy at large - changing the Fed Funds Rate and Signalling. The Fed Funds rate is simple; they adjust the short end of the Yield Curve and the rest adjusts as the market adjusts to the cut/hike of the Fed Funds Rate.
The other way, which is less straightforward, is through signalling. In doing this, the Fed chairperson, currently Jerome Powell, will discuss future expectations regarding rates and inflation, hoping to ease consumers’ and investors’ minds about where things are going in the future, thereby influencing economic activity without changing the rates forcibly. Many are interested to see what signalling activity will come from the press conference.
Did you miss yesterdays’s piece? No worries! Get it right here and catch up on the madness.
Fundamentals
Tuesday Close:
Dow Jones Industrial Avg: -1.09%
S&P 500: -0.78%
NASDAQ: +0.29%
US 10 YR: 0.825% | 98 1 / 32
Crude OIL: $38.47
Market Madness Portfolio: -0.20%
COVID 19 Global Cases: 7,272,999
Indices Overseas:
FTSE 100: -1.77%
Nikkei: -0.38%
Hang Seng: +1.13%
The 60/40 flunk
The most iconic portfolio in investing - the 60/40, or 60% stocks and 40% bonds - appears to be weak in the eyes of historically low rates. The traditional investing strategy allocates 60% of investments into equities and the other 40% into government bonds, acting as a buffer, protecting the overall return on the portfolio. This worked largely in part because equities and bonds have been historically and reliably negatively correlated (when one goes up, the other goes down).
“In fact, the 60/40 portfolio was even better than that. Government bonds acted as an insurance policy, helping to cushion the investor against losses on their equity holdings, but this was an insurance policy the government paid you to own. The coupon on your bond holdings provided a material source of return, on top of the protection you gained by diversifying your equity risk.” (excerpted from article)
Due to yields on government bonds approaching close to zero, the insurance protection and turns more into a liability. Given also that the prices on government bonds are not entirely subject to rises either, there is very minimal gains to be had on this part of the portfolio. This absence of protection breaks the foundations of the rationale behind why the 60/40 was so popular and, for the most, successful.
The breaking of the 60/40 also puts a pinch on some financial planners whose clients favor simplistic investing strategies like this one. Opting for something else that generates the same return outlook becomes a challenge.
While there are many different asset allocations and strategies that could generate the same level of return that the 60/40 does, or even more for that matter, many investors are hesitant to ‘leave their money to chance’ in something they know very little about, like cryptocurrencies, long/short hedging strategies, or simply commodity-based diversification. With the loss of the efficacy of the 60/40 for now, the rush to find another strategy (and appease client’s risk appetite and goals) appears to be akin to putting the square peg int he round hole.
For anyone interested in asset management, allocation strategies, this topic is going to be really interesting to keep an eye on for the next couple years.
Read more here: https://www.ft.com/content/8a9efc6c-ca71-41e8-bec9-3702f5d67f7e
Quick Takes
Coresight is predicting nearly 25,000 store closures to occur in 2020, with the majority being in-mall locations. (via CNBC)
Apple rumored to soon announce a move away from Intel chips inside their Mac products. (via CNBC)
COVID 19 turned put financial planners to the test. (via CNBC)
HSBC weighs in on China’s controversial Hong Kong security law. (via WSJ)
AstraZeneca steps up antibody testing. (via CNBC)
Vroom car sales app surpasses price target for their IPO, signalling a strong start for the firm. (via FT)
Insurtech start-up, Lemonade, announces plans to go public, citing stronger margins than traditional insurers. (via FT)
U.S. seeks to expand shipping tanker sanctions in effort to cut off Venezuela-Iran oil supply trade. (via WSJ)
Apple’s iPhone 12 production set to start in July. (via ATOM+)
Reader’s Corner
The reader has been on an opinion piece kick lately. I’ve been trying to get educated on some of the macroeconomic and financial issues that have been pressing for some time now.
Here are some of the ones that I enjoyed: https://www.ft.com/content/47b4c0cb-7299-49a2-9a56-242ad3109250 and https://www.ft.com/content/094fa5d4-d3c1-458b-a971-9efe506a99d8
General Banter
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Behind the Madness
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