Commentaries
PMC Weekly Review - June 17, 2016
A Macro View – A Return to Volatility
Global markets were treated to a return of volatility this week. The proximate cause was the stark realization that the upcoming June 23 referendum in Great Britain over whether to remain in the European Union might actually produce a victory for the “Leave” vote. Until very recently, betting markets and investor wisdom saw little chance of that outcome, until a slew of polls showed that the vote might not only be close, but also might actually lead to a fracturing of Europe’s tenuous economic and political balance.
The result was a sell-off in equities, a spike in the volatility index as measured by the VIX (often referred to as the fear index or the fear gauge), and a flood of money pouring into A-rated sovereign bonds, such as Germany and the United States. That action pushed yields lower: into negative territory for German bunds and Japanese bonds; down to 1% for UK bonds; and towards 1.6% for U.S. 10-year Treasuries. The trend to low, low rates was then confirmed by the Federal Reserve’s Federal Open Market Committee (FOMC) meeting this week. Rather than raising the short-term lending rate to 50 bps as had been widely expected only a few months ago, the Fed and its Chairwoman Janet Yellen held rates steady, and signaled that the pace of future increases would be slow indeed, with perhaps only one more increase this year. Although the possibility of a “Brexit” was one factor, so too was the slowing curve of U.S. job growth, along with still modest evidence of strong wage growth.
In tandem with expectations for yet another quarter of falling earnings for the S&P 500, these developments firmly checked what had been some decent momentum propelling global and U.S. equities, as well as bond yields, higher. It’s certainly true that markets did not enter anything resembling panic: we had no sell-offs equivalent to what we witnessed at the beginning of 2016. Sentiment in that sense is guarded, but not yet relentlessly negative, although bank stocks did decline more steeply in anticipation of the negatives associated with a possible rupture of the EU.
The Brexit referendum, however, is simply another one of the market risks, which are neither common nor as uncommon as many would like. Traders can and must position for market reactions, but most investors should not, given that in this case, the long-term consequences could cut several different ways, and may not have a simple and quantifiable impact. The larger context is that we remain firmly entrenched in a low-yield, low-return environment, and there is little indication that it will change anytime soon.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2016 Envestnet. All rights reserved.