Sections
US Bonds
Developed Market Stocks
Commodities
Emerging Stocks and Bonds
The
tables in each section detail the current and prior week ratings; the
accompanying text reflects the updated outlook.
US Bonds
Market
Resilience Index Rating
For Week of…
|
7/25/2016
|
7/18/2016
|
US 10y Treasury yield
|
0
|
0
|
US 10y Treasury futures
|
2
|
3
|
Credit spreads
|
0
|
1 v
|
High yield bond prices
|
3
|
2 ^
|
With a 0
rating on the resilience scale, the US 10y Treasury yield is 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 from 3 to 2 this week. 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, down
from 1 in the prior week, as anticipated, suggesting that spreads will narrow.
Consistent
with the above, US high yield bonds are now rated 3, or highly resilient, up
from 2 previously, again as expected. All else being equal, 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 Rating
For Week of…
|
7/25/2016
|
7/18/2016
|
DJ Industrial stocks
|
2 ^
|
2 ^
|
DJ Transportation stocks
|
1 ^
|
1 ^
|
European stocks (SPE)
|
1
|
0
|
Japanese stocks (TPX)
|
1 ^
|
0 ^
|
With a rating
of 2, US stocks, as represented by the Dow Jones Industrial Average, display moderate
resilience, suggesting that prices will tolerate negative news and events
reasonably well in the near term. All else being equal, prices will tend to
move higher.
European
stock prices have a rating of 0, signaling that they are vulnerable. This
suggests prices will likely fall with negative news and struggle to recover. Some
elements of resilience are cyclical, however, and a key European stock
resilience force is nearing a low in its cycle. Consequently, we may see a rating
upgrade over the next month or so.
Japanese
stocks also have a 0 rating and prices may fall in response to negative news.
That said, they are closer to experiencing a shift to a higher rating than are
European stocks.
In
either case, prices may move higher on good news, such as additional accommodation
by policymakers. This may correspond to
a rise in resilience (e.g., rating of 1). However, news-driven price increases in the
absence of higher resilience could prove temporary.
Bottom
line: Overweight US stocks, underweight European and Japanese stocks.
Commodities
Market
Resilience Index Rating
For Week of…
|
7/25/2016
|
7/18/2016
|
SPGSCI
|
2
|
2
|
Crude oil (WTI )
|
2
|
2
|
Gold
|
3
|
3
|
Copper
|
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 SPGSCI has a rating of 2, down from 3
previously over the last few weeks, reflecting the fact that oil prices appear vulnerable
on a short-term basis. However, this looks to be a short-term breather to 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 Rating
For Week of…
|
7/25/2016
|
7/18/2016
|
EM stocks (MSCI MXEF)
|
3
|
3
|
EM bonds (FNMIX)
|
3
|
3
|
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.
Plausible Narrative
Plausible Narrative
A
plausible narrative that makes 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. The US Fed has the strongest medicine
globally, and it is needed. However, the US is in the least need of the
medicine. Therefore, we in the US will benefit from the strong medicine being
administered globally, and benefit more than we alone need. 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 will be
positioned according to the MRI ratings – overweight the resilient, underweight
the vulnerable.
Please contact me with questions or comments in
the tab above.
