Week in Review
Global stocks rose on low volume and low volatility during the (unofficial) last week of summer. Domestic small-cap companies led gains, while overseas, developed nations outperformed developing ones on the back of strong gains in Europe. The U.S. dollar strengthened leading up to Friday’s August jobs report. Speculators anticipated a moderate-to-strong report would usher in interest rate hikes sooner rather than later from the Federal Reserve (Fed). The report showed 151,000 jobs were created in August, below expectations but still indicating a healthy labor market. The stronger dollar contributed to declines in the price of oil and the broader commodity market. Overall, fairly positive global economic data – from U.S. nonfarm payrolls to global manufacturing purchasing manager indices (PMIs) – wasn’t enough to damage the broad bond market as the Barclay’s Aggregate finished slightly higher despite the yield on the 10-year Treasury rising to nearly 1.60%.
Momentum: Fact or Fantasy?
At CLS, one of our Investment Themes for 2016 is X-factor. X-factor embodies all things smart beta and factor related, and applies to how we allocate portfolios, as well as the vehicles we use. One factor that CLS embraces is momentum. Momentum can be a friend and sometimes a foe, but it has been proven to be a robust factor across asset classes and market segments in much the way value has been proven effective by academics.
Turns out, through some advanced “research” by CLS, momentum extends beyond investing and into the realm of fantasy football! We have discovered that if an NFL player scores in the top 50 of fantasy rankings one year, he has about a 50/50 chance of scoring in the top 50 again next year (not quite as likely as I thought). That same player would then have approximately a one-in-four chance of scoring more points than he did in the previous year. We can improve on this using a simple momentum study. If an asset class outperforms the MSCI ACWI Index over any rolling 12-month period, there is a little more than 60% chance it will continue to outperform in the year ahead. There is about a one-in-three chance that the outperformance will be larger.
Fun and games (literally) aside, momentum is just one of the factors we utilize to build portfolios. Pairing momentum with value can be a particularly powerful combination when they intersect. It’s also important to remember that momentum is different from performance chasing. Momentum is carefully measured over specific time frames consistent with performance persistence and trend. Currently, emerging markets show strong positive momentum and also happen to be one of the cheapest asset classes available. When drafting up a portfolio, it would be wise to make sure emerging markets are in your starting lineup.
Best Time to Invest
Record stock market highs, record low interest rates, geopolitical fears – and the list of excuses and reasons not to invest continues. Despite the fact that we have tackled all of these concerns and then some (market highs here, here, and here; record low interest rates; geopolitical fears), there are other, less apparent, reasons that make today the best time to be an investor. Two years ago we mentioned several reasons, but there are many more:
Technology. Literally everything is at your fingertips nowadays. Investors can check their account balances minute-by-minute (not recommended) and make contributions to their investment portfolios on the fly (highly recommended). Mobile apps allow for detailed analysis of performance and asset allocation with incredible ease. For instance, I can check my 401(k) by just using my fingerprint. Did I mention CLS has a mobile app designed for advisors and their clients? Download it here if you haven’t already.
Judicial Landscape. Lawmaking is never without flaws, and recent U.S. Department of Labor (DOL) rulings are no exception. But certain attributes of the changing investment vehicle landscape are very positive for investors. The days of hidden 5%-10% upfront loads for mom and pop investors are ending. Waves of lawsuits from qualified plan investors are leading to even lower fees for retirees and squeezing revenue sharing. Future decisions and rulings will hopefully continue down the path of favoring investors.