Author: Christopher P. Hendrix, CMT

Making better decisions usually entails some sort of the following:

Current decisions are not cutting it & you are aware
Perform analysis on WHY & WHERE in the process things are going wrong
Get new information for your decision making formula: Alternatives
Make a different decision

What are the Current Trends?

The 30-year Treasury Bond (pictured below) currently reflects the crosswinds of recent headlines. Improvement in the jobs data and consumer spending, while not consistently positive, point to traction in the economy. Some detractors to the positive traction have been the volatility in oil, slowed growth in China, and the threat to global commerce which could restrain the US from achieving a more robust economy. When you have mostly consistent positive improvements but heavy weighted detractors you get a crosswind environment. You can see these factors charted against the 30-year Treasury Bond below.

Bond prices tend to trend lower during periods of economic expansion and prices tend to rise during periods of heightened uncertainty. The new environment we are seeing in the markets is a condensed, extreme version of this cycle. Down Up, Down Up.

The chart above displays a large sideways pattern after the steady climb during 2014.

The pink box indicates when investors perceived an improvement in the domestic economic condition starting Quarter 1 in 2015.

Since summer of 2015, however, fears of a global economic slowdown were an influence to higher prices and lower yields (blue box)

Over the last month, bond prices have eased lower as oil prices have experienced a mild rebound (see green box).

There are many other factors that have played roles of influencing prices. However, the forces mentioned above seem to have a stronger impact over others, not to mention the additional impacts added daily- much like the recent Federal Reserve Meeting last week.

Blending all these influences together creates the crosswinds that make up the path of the market.

Flexibility & Price Movement

Eventually, the short, intermediate, and longer-term trends will get on the same page but we do not know when that will be, nor do we need to be skilled at such forecasts. (See Why here)

Some investors perform extensive research into macro-economic models, only to be subjected to the crosswinds that can push around bond price. A weakness of macro-economic models is the negative impacts to a portfolio while investors wait for their models to possibly yield desired results. Instead of relying on correct predictions through an economic model, flexible methods rooted in the information derived from price action and sentiment evaluated over different time frames can create better risk/reward opportunities.

The price movement of securities, and in this case bonds, are inclusive of economic impacts whether it is the Federal Reserve, Chinese economics, the oil market, or combination of these events.

For example, further declines in treasury bond prices generally have positive influences on growth assets such as high yield, preferred stocks and domestic equities. Additional signs of economic instability, domestic and foreign, could lead to a rise in treasury bond prices as well as other higher rated bond classes. Methods employed by our management not only assess where to invest but also incorporate the time frame factors of long, intermediate, and short terms.

Successful investing does not require predicting an outcome, but having a sound plan of action in place improves the odds of success

The Take-Away:

How do you make better investment decisions in current trends?

Know the current market environment for which you are investing
Use flexible/agile models that evaluate different time frames
Use tools that are efficient and inclusive of other data like price movement

Negative Interest Rates & Shrinking Balance Sheets

By Christopher P. Hendrix, CMT

On February 26, 2016

In Market Research

A little more than a year ago, the European Central Bank adopted a negative interest-rate strategy. The Bank of Japan recently followed suit. What is this strategy supposed to achieve, and how is it impacting financial markets? Let’s start by examining what these central banks hope the negative interest-rate strategy achieves. The European Central Bank and the Bank of Japan are now charging their member banks on overnight cash reserves. The idea is to forcibly encourage member banks to loan money to potential customers that may in turn, stimulate the economy through spending, not saving. From the member bank’s perspective, an outcome like that could entail higher than acceptable credit risk on the bank’s loans. Member banks could also pass along the negative interest-rate to depositors which could lead to an exodus of their customers. The decision some banks have chosen is to not charge these negative interest rates to customers which then reduces the member bank’s balance sheets, putting pressure on their profit margins. The weakening of bank balance sheets is being labeled as one of the contributing factors to the stressed financial markets, especially foreign markets (see chart below).

Click to Enlarge

Other choices banks and investors have is to buy government bonds (foreign and US). Investors are taking their foreign assets and depositing them in “safer” US securities, playing a major role in boosting the US Dollar. The US has yet to adopt a negative interest-rate policy but Janet Yellen, the US Federal Reserve chair, has recently gone on record as saying that type of policy is “on the table”. This relatively new financial engineering has rippled through the global financial system and its long-term impact has yet to be seen.

Spectrum’s Portfolio Management Impact:

The news itself of negative rates does not specifically cause positions to be altered in the Spectrum’s funds or strategies. The influences, however, to the various asset classes, stocks, bonds, currencies, etc., can be assessed through the price action in those markets. This could be in the form of new trends, up or down, or through jagged price action. More specifically, positive influences can be seen in quality-rated bonds, corporate and government. Upward influences in the US Dollar have played a role in volatility and negative trends seen in global equity markets, primarily the emerging markets. Adjustments within our funds or strategies generally reflect these prevailing trends.

Disclosure

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Spectrum Financial, Inc. in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Spectrum Financial, Inc. expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. For full disclosure please see disclosures page here.