What Is Making And Losing Money In The Current Market Rally?
Weekly Notes With Tiho — Issue 23
Location: Saigon, Vietnam
Global equity markets from corner to corner are on a record-breaking and seemingly unstoppable run.
The All Country World Index, also known by the ticker ACWI, closed up every single month in 2017.
That had never happened before.
Is This The Blow-Off Top?
SPY has been hugging its 3-month moving average since the US election — with the largest sell-off since then being only 2.5%.
Instead of finally correcting — which was my call in mid-December based on history and statistics — US equities have now started a vertical "blow off" rally.
As I pen this, it has been 390 trading days since a 5% pullback in the S&P 500. That is one of the longest stretches without a 5% correction in history.
I have posted these charts a handful of times over the last couple of months. The truth is, even the most bullish of bulls did not expect this.
Emerging Market Risk Taking
As you can imagine, the near perfect uptrend in global equity markets has led to risk-taking across the board, but especially so in Emerging Market assets.
EEM is being bid up towards record highs as the index is currently enjoying one of its best risk-adjusted periods of history.
Furthermore, the more volatile nature Emerging Markets has all but disappeared, as the market refuses to correct — even slightly — for 23 months now.
Investors are currently content to hold risk EM Corporate Bonds with less than a 2% premium over equivalent duration risk-free Treasuries.
That is the lowest premium in over 10 years for such a risky asset class.
Negative Impact of Higher Rates
However, not all asset classes are performing well.
US Real Estate Investment Trusts, which are sensitive to interest rates, have broken to a lower low.
The drawdown on the total return basis is now -10%.
Meanwhile, International REITs — tracked by VNQI — are performing much better as they tend to correlate closer to stock markets outside the US.
The momentum of 2017 has carried into 2018 as global equity markets pick up where they left off.
Last week I noted a few areas that could benefit if inflation takes hold. Here, I highlighted just one area that is already being impacted by the prospect of higher rates.
Which other sectors or assets could be at risk?
Where are the lowest-risk opportunities to place capital?
If you would like to know how I am positioning my client’s portfolios and how we are preparing for 2018 with our asset allocation strategy — get in contact by clicking below and filling out the brief survey. I’ll get back to you within 24 hours.