Market Resilience Blog
Post
In the sections that follow, I provide an update on the Market
Resilience Index (MRI) for key asset classes.
Sections
US Bonds
Developed Market
Stocks
Commodities
Emerging Stocks and
Bonds
The ratings range from 0-3, with 3 being the highest. The symbol “^” means that
the rating is likely to move higher (becoming more resilient). The symbol “v” means the rating is likely to
move lower (becoming more vulnerable).
The tables in each section detail the current and prior week ratings;
the accompanying text reflects the updated outlook.
US Bonds
Market Resilience Index Ratings
For Week of…
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
US 10y Treasury yield
|
1
|
0
|
0
|
US 10y Treasury futures
|
2
|
2
|
3
|
Credit spreads
|
0
|
0
|
1 v
|
High-yield bond prices
|
3
|
3
|
2 ^
|
With a 1 rating on the resilience scale, the US 10y Treasury yield is
somewhat vulnerable to declines. I expect this condition to remain in place for
the next few weeks.
By the same token, US 10y Treasury bond prices display strong
resilience, although the rating for the futures counterpart (TY1) has fallen to
2 recently. Near term, resilience is abating, and prices may ease slightly.
That said, the market does not appear especially vulnerable now, suggesting any
decline will be moderate.
Credit spreads – US corporate BBB less 10y Treasury yields – are
currently rated 0, suggesting that spreads will narrow.
Consistent with the above, US high-yield bonds are now rated 3, or
highly resilient. All else being equal, high-yield bond prices will tend to rise.
Bottom line: US bonds, in general, and high-yield issues, in
particular, will remain attractive investments over the next few weeks.
Developed Market Stocks
Market Resilience Index Ratings
For Week of…
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
DJ Industrial stocks
|
3
|
2 ^
|
2 ^
|
DJ Transportation stocks
|
2
|
1 ^
|
1 ^
|
UK Stocks (UKX in GBP)
|
3
|
3
|
3
|
European stocks (SPE in EUR)
|
1
|
1
|
0
|
Japanese stocks (TPX in JPY)
|
1
|
1 ^
|
0 ^
|
With a rating of 3, US stocks, as represented by the Dow Jones
Industrial Average, will display higher resilience. Stock prices will tolerate negative news and
events reasonably well in the near term.
There is good chance of price declines attributable to a reversal of the
recent strong gains. If this does occur,
it is likely to be short-lived.
UK stocks are rated 3 and have been resilient for the last several
weeks. Qualitatively, they are getting a
boost from the weakening UK currency.
European stock prices have a rating of 1. While more vulnerable than the DJ Industrial
stocks, they are finding more resilience over the last few weeks. Some elements of resilience are cyclical, and
a key European stock resilience force has reached a low in its cycle.
Japanese stocks also have a 1 rating.
Bottom line: Overweight US Industrial stocks, underweight European and
Japanese stocks.
Commodities
Market Resilience Index Ratings
For Week of…
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
S&P GSCI
|
2
|
2
|
2
|
Crude oil (WTI )
|
2
|
2
|
2
|
Gold
|
3
|
3
|
3
|
Copper
|
3
|
3
|
3
|
Overall, commodity prices remain resilient.
The S&P Goldman Sachs Commodity Index represents a basket of
commodities, with a high weighting in crude oil. The S&P GSCI has a rating
of 2, down from 3 a few weeks ago, reflecting the fact that oil prices appear
vulnerable on a short-term basis. However, this looks to be a short-term
breather from price increases rather than a fundamental shift in longer-term
resilience.
Gold and copper, meanwhile, continue to be resilient, with ratings of
3 for both. Prices may soften near term, but longer-term resilience forces
remain decidedly positive for the two metals.
Bottom line: Overweight commodities, in general, and gold and copper,
in particular.
Emerging Markets
Market Resilience Index Ratings
For Week of…
|
8/1/2016
|
7/25/2016
|
7/18/2016
|
EM stocks (MSCI MXEF in USD)
|
3
|
3
|
3
|
EM bonds (FNMIX in USD)
|
3
|
3
|
3
|
Shanghai Comp (CNY)
|
1
|
1
|
1
|
Emerging market stock and bond prices continue to be resilient. EM stocks and bonds, represented by the MSCI
Emerging Markets Index and a popular EM bond mutual fund, respectively, have
ratings of 3.
In both cases, longer-term resilience forces are robust – and
decidedly so. I expect this condition to remain in effect for several weeks. They will likely tolerate negative news and events fairly
well.
Chinese stocks, as represented by the Shanghai Composite, have a
rating of 1. There is minor support for
higher prices, but this could prove fleeting in the absence of resilience from
the longer-term forces.
Plausible
Narrative
A plausible narrative that accommodates the broad set of MRI ratings
across asset classes goes like this...
Despite positive signs in the US, the global economy is
struggling. There is high uncertainty
about the political situations in the US, UK, and Europe. The best quick-fix remedy for all our ills is
a mix of low interest rates, calming voices from the Federal Reserve’s Janet
Yellen and her counterparts around the world. Globally, the US Fed has the most
potent medicine, and it is needed. However, the US actually has the least need for
it. We in the US will benefit more if the medicine is administered globally.
For the time being, this will result in greater resilience for US stocks and
bonds.
Please note:
·
The disciplined analysis of market
resilience drives this narrative
·
Other narratives may also be plausible
·
When the bottom-up resilience data
suggests a change in the narrative, that change will be made
·
The narrative does not affect the
analysis of market resilience or the target weights in the model portfolios
Focused 15 Investing model portfolios are positioned according to a
wide range of MRI ratings. However, the
guideline is consistent across all markets – overweight the resilient,
underweight the vulnerable.
Please contact me with questions or comments in the tab above.
