An environment of slow growth and easy money is a tailwind for fixed income, but investors should not throw caution to the wind argues Senior Portfolio Manager, Gene Tannuzzo. Historical parallels may help bond investors set expectations in the second half of the year.
Additional reading: Fixed Income Quarterly Review Our U.S. Fixed Income Team reviews the 2nd quarter, during which 10-year U.S. Treasury yields fell below 2% and the yield curve inverted. The market has been responding to well-known domestic economic pressures, as well as trade and tariff tensions.
Has the small-cap factor been arbitraged away? Larger and growthier stocks continued to outperform smaller and cheaper issues in the first half of 2019, and their performance gap, as a group, has reached historically high levels. Jason Wang, Global Head of Quantitative Research, looks at the persistent underperformance of the value factor, as well as the diminishing predictive ability of size as a factor.
Expectations for long-term performance are lower across asset classes, as the trade war and the Federal Reserve's pivot on rates are factored into calculations by the Global Asset Allocation Team. The semi-annual update of capital market return forecasts used in strategic portfolio allocations is now available.
Additional reading: Components of Market Returns Global Asset Allocation analyst, Alex Rivas, looks at a building blocks approach to decomposing equity and fixed income returns. By evaluating the components of return, a portfolio manager can create forecasting models such as those used in our 5-year capital markets outlook.
The Fed's abrupt policy shift earlier this year ended predictions for any near-term rate hike. Now market speculation has shifted instead toward the timing of a rate cut. Senior Fixed Income Portfolio Manager, Gene Tannuzzo, explains how the end of accommodative global monetary policy may still be far out on the investment horizon.
Mac Ryerse, Lead Analyst (U.S.) of Responsible Investment discusses an approach to finding actionable insights within a quantitative framework that evaluates financial stewardship and ESG management. By applying a materiality lens — such as that established by the Sustainability Accounting Standards Board (SASB) — investors can focus on the key ESG performance factors.
The recent breakdown in trade talks between the U.S. and China were a surprising development for the financial markets, one that has analysts reassessing the impact of trade policy on growth and inflation. Anwiti Bahuguna, Head of Multi Asset Strategy, looks at the implications for China and the U.S. if this current standoff is not ended soon.
The Federal Reserve Bank of New York presents their research on using the shape of the yield curve, notably yield curve inversions, as an indicator of economic activity, including their probability of U.S. recession chart*.
After a year of record stock buybacks, Portfolio Manager, Scott Davis looks at buybacks, dividends and the ways in which corporations utilize cash to create long-term sustainable value for shareholders.
As governments and corporations added debt to their balance sheets in the years since the financial crisis, U.S. consumers plotted an opposite course, shedding their debt burden over the last ten years. Jason Callan, Senior Portfolio Manager, Head of Structured Assets and Thomas Heuer, Senior Portfolio Manager, talk about the current environment and how the changes in underwriting rules, in addition to consumer delevering, have bolstered the asset class’s credit quality.
U.S. stocks staged a major comeback in the first quarter, but once again, there was a marked dispersion between growth and value returns. Jason Wang, Global Head of Quantitative Research, considers the current value conundrum and how different approaches to value investing can yield dramatically different results.
Bond markets had a lot to absorb in Q1: 10-year Treasury bonds rallied causing sections of the yield curve to invert, the Fed called an end to quantitative tightening for September and put further rate cuts on hold, and global growth appears to have stalled. Our U.S. Fixed Income team looks at the “bad news is good news” world of bonds and what shaped returns for the quarter.
Additional reading: After the Pivot Gene Tannuzzo, Deputy Head of Fixed Income, reviews Q1 and provides his current outlook.
Does yield curve inversion merit the attention it receives? Anwiti Bahuguna, Head of Multi Asset Strategy, discusses inversion, the factors that drove recent bond price movement and the relationship between yield curve inversion and recession.
What happens when no one wants a building by a highway? Bryan Sanchez, Chief Investment Officer, Lionstone Investments, discusses the challenges of late-cycle real estate investment, property obsolescence and the importance of a data-driven approach.
How should investors handle the flood of ESG data? Mac Ryerse, Lead Analyst (U.S.) of Responsible Investment and Kirk Moore, Global Head of Research, sat down with Pensions and Investments to discuss an approach to finding actionable insights amid the wealth of available ESG data.
David Lucca, Samuel Hanson, and Jonathan Wright at the Federal Reserve Bank of New York, Liberty Street Economics, examine the sensitivity of long-term interest rates to movements in short-term rates and show that this relationship has changed markedly since the year 2000. Their study has implications for the transmission of monetary policy and our understanding of news shocks and their impact on long-term rates.
The argument that “quantitative easing (QE) was good for the stock market, therefore the opposite must be bad” has an appealing logic says, Anwiti Bahuguna, Head of Multi Asset Strategy, but that argument is wrong. Bahuguna argues that Quantitative Tightening is not the cause of recent market volatility.
Alex Rivas, an investment analyst on our Global Asset Allocation Team, examines the relationship between Robert Shiller’s CAPE ratio, expected returns, and the benefits of a "faster signal" version of the valuation metric.
A decade after the Lehman bankruptcy, there are still some corners of the global banking system that have not fully resolved. Mark Burgess, Deputy Global CIO and CIO, EMEA, evaluates the different methods countries used to address post-crisis banking issues and the problems posed by the countries that have failed to fully address their banking issues.
After a rocky first three quarters of 2018, a diversified approach roared back in the fourth quarter of the year. Joshua Kutin, Head of Asset Allocation, North America reviews the sharp change in market dynamics and discusses the prospects for diversified asset allocation heading into 2019.
Q4 2018 did not lack for sources of fixed income turmoil — the yield curve inverted, the Fed rate raised rates, and market volatility returned. Our U.S. Fixed Income team reviews the market activity and drivers of return for the fourth quarter.
Daisuke Nomoto, Head of Japanese Equities, believes that the reforms taking place in Japan will provide a foundation for longer-term secular growth and a boost for Japanese equities. Are investors positioned to take advantage of the changing dynamics?
"We believe that the Fed is likely to be less swayed by theoretical leanings and more likely to be data dependent over the next 12 to 24 months," writes Anwiti Bahuguna, Ph.D., Head of Multi Asset Strategy. She also weighs the impacts of an escalation in the trade war, tax cuts and positive supply side surprises.
At the beginning of 2018, commodities appeared to be on the cusp of a bull market. Economic growth was strong and synchronized in both developed and emerging market countries. But trade issues, along with a strengthening U.S. dollar and increasing U.S. interest rates, have depressed commodities prices throughout the year. David Donora, Head of Commodities, weighs the possibility of a rebound in the asset class in 2019.
Should we be as optimistic as Apple CEO Tim Cook in thinking that the trade war between the U.S. and China will de-escalate soon? Or should we believe that the US-China trade war could last 20 years, as Alibaba’s Jack Ma warned? While the relationship between the two powers is obviously important for the region, Soo Nam Ng, Global Head of Asian Equities, believes that the region has buffers to weather current tensions.
Adrian Hilton, Head of Global Rates and Currency, considers how in spite of the recent rise in U.S. bond yields, they remain low by historical standards. Will bond yields ever readjust to their normal historical cycle?
Newly sworn in Vice Chairman of the U.S. Federal Reserve Board, Richard H. Clarida delivered a speech in which he shares his thinking on the current state of the U.S. economy and his views on the way forward for U.S. monetary policy.
Additional reading: Measuring the Natural Rate of Interest*. The Laubach-Williams and Holston-Laubach-Williams models provide estimates of the natural rate of interest, or r-star, and related variables. Their approach defines r-star as the real short-term interest rate expected to prevail when an economy is at full strength and inflation is stable.
Joshua Kutin, Head of Asset Allocation, North America and Anwiti Bahuguna, Head of Multi Asset Strategy, provide their views on the historically narrow market that we have seen in 2018, and on the prospects for growth as tariff rhetoric continues to escalate.
Additional reading: Our view on U.S. Equities Joshua Kutin, Head of Asset Allocation, North America, discusses the relative appeal of U.S. equities within an overall equity allocation.
Jason Callan, Senior Portfolio Manager, Head of Structured Assets, discusses the current state of the securitized bond market. In addition to new regulation, the strength of the economy has provided support for the asset class, while still allowing opportunities for active research and management to add value.
Anwiti Bahuguna, Head of Multi-Asset Strategy, considers whether the recent slowing of some of the housing market data is the end of the post-crisis housing boom, or just a temporary slowdown within the larger housing growth cycle.
For asset allocators, it is not only important to make the correct asset class decisions, but also to allocate efficiently within those asset classes. Joshua Kutin, Head of Asset Allocation, North America, looks at fixed income and the various decisions his team confronts when investing in the asset class.
The cyclical relationship between growth and value has overwhelmingly favored growth on a cumulative basis for several years. Our Quantitative Research team analyzes the reasons for this and how much longer the investing environment can support growth factor investing.
Additional reading: Factset S&P 500 Earnings Season Update: August 13, 2018 * As of August 13, 2018, 91% of the companies in the S&P 500 have reported actual results for Q2 2018. 79% of these companies have reported actual EPS above the mean EPS estimate, which is the highest percentage since FactSet began tracking this data in Q3 2008. Source: FactSet * financial data and analytics.
After having run on a platform of protecting America’s trade interests, President Donald Trump and his administration enacted new trade tariffs directed at China and have threatened even more. The biggest news from the region, however, may have been President Trump’s meeting with Kim Jong-un. Soo Nam Ng, Global Head of Asia Equities, assesses the shifting dynamics in Asia and the impact they will have on investors.
Eric Engstrom and Steven Sharpe at the Federal Reserve note that the “near-term forward spread” in the yield curve may be a stronger predictor of recession than the more commonly referenced long-term spread. Engstrom, Eric, and Steve Sharpe (2018). “(Don't Fear) The Yield Curve,” FEDS Notes. Washington: Board of Governors of the Federal Reserve System, June 28, 2018, https://doi.org/10.17016/2380-7172.2212.
Josh Kutin and Anwiti Bahuguna of the Columbia Global Asset Allocation Team present their views on current market conditions and their outlook for asset classes as we begin the second half of the year.
The Fed raised rates once during the quarter and 10-year U.S. Treasury bond yields cleared 3% in sustained fashion for the first time since 2011, only to fall below that level as the quarter ended. Our Fixed Income team assesses the significance of these and more in its quarterly overview of the fixed income market.
With the Federal Reserve on a clear path to higher interest rates, investors may look for ways to hedge against rising interest rate risk. Floating rate loans, which offer an adjustable coupon reset, may be an attractive option in this environment.
Rose Beale, Thematic Analyst, Responsible Investment, and Gareth Davies, Head of Responsible Investment Solutions consider the UN Sustainable Development Goals as a potential guide for investing towards a more sustainable world.
Researchers at the Federal Reserve Bank of Boston examine one possible explanation for the lack of wage inflation: The labor market is not as tight as the unemployment rate indicates. Specifically, they investigate the possibility that informal “gig” work embodies an economically significant amount of labor market slack that is not captured in the U-3 unemployment rate and other standard estimates of slack.
In an interview with Pensions and Investments, Dara White, CFA, Global Head of Emerging Markets Equity, discusses his 2018 outlook for the asset class, where he sees opportunity, and how he finds worthy emerging markets investments.
Ilan Furman, Portfolio Manager, Global Emerging Markets Equities, looks at the current state of the Latin American equity markets and sees the possibility of long-term improvement beyond any short-term uncertainty.
Daisuke Nomoto, CMA (SAAJ), Head of Japanese Equities and Senior Portfolio Manager, concludes that Japan’s equity market, supported by the inflationary goals of the current government, reasonable valuations and favorable economic backdrop, can continue its upward trend.
Colin Lundgren, Global Head of Fixed Income, looks at the success fixed income markets have had over the last two years and questions whether the environment can support a third successive year of good performance.
Toby Nangle, Head of Global Asset Allocation and Anthony Yates, Former Professor of Economics, Birmingham University; former Senior Advisor, Bank of England, evaluate the quantitative easing program of the Bank of Japan, which stands out for its size and scope.
Thomas Egan Jr., FSA, EA, CFP; Actuary, Liability Driven Investments, examines the impact the new IRS mortality table has on plan liability for minimum funding, lump sum pension payments and PBGC variable premiums for underfunded plans.
Daisuke Nomoto, CMA (SAAJ), Head of Japanese Equities, Senior Portfolio Manager, assesses the current state of the Japan equity market and concludes that some long-sought economic goals and reforms are finally taking hold.
Soo Nam Ng, Head of Asian Equities, compares the relative low level of volatility in the U.S. to the current environment in China and sees the shift in emphasis from fast growth to sustainable growth as beneficial to the long-term equity market prospects in the country.
The Global Asset Allocation Team performs its semi-annual review of market expectations. This helps the team set strategic asset allocations and design portfolios with diverse investment goals. Maintaining long-term forecasts provides helpful context for responding thoughtfully to daily swings in market prices.
New York University Professor, Menachem Brenner, who pioneered the VIX index, is currently working on a measurement for "ambiguity", or uncertainty, as distinct from risk, in an attempt to explain why markets are demonstrating historically low volatility readings. Read his interview with the Nikkei Asian Review.
Mark Burgess, Deputy Global Chief Investment Officer, assesses the next phase of global monetary tightening. The U.S. Federal Reserve has raised rates several times since December 2015 and has signaled the beginning of the end of QE. Will other central banks follow?
Thomas Egan Jr., FSA, EA, CFP, Actuary, discusses how the latest change to FASB rules should encourage plans to move toward de-risking strategies. With less emphasis on Expected Return on Pension Assets, the objection to Liability Driven Investing, as well as a larger allocation to fixed income in general, has been removed.
Natasha Ebtehadj, Portfolio Manager, Asian Equities, looks at Prime Minister Narendra Modi's reform program and suggests that efforts to modernize the financial system will have lasting benefits for the country.
Additional Reading: Argentina: The "Emerging" Emerging Market Ilan Furman, Portfolio Manager, Global Emerging Markets, discusses Argentina’s efforts to reform its economic health and what its reinstatement to the MSCI Emerging Markets index will mean in symbolic and practical terms.
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The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate. Information provided by third parties is deemed to be reliable but may be derived using methodologies or techniques that are proprietary or specific to the third-party source.