Weekly Commentary, 6/27/16 – 7/1/16
It was truly a remarkable week following the June 23rd vote of the United Kingdom to leave the European Union. The repercussions on global growth and political uncertainties followed through to Monday where the major U.S. indexes lost another -1.5% after shedding -3% the previous Friday. Sentiment began to swing from pessimism to optimism on Tuesday as doubts arose about the U.K. actually exiting the EU and on hopes that global central banks would keep monetary policies loose and provide additional liquidity to stabilize markets. By Friday, U.S. stocks completed their biggest weekly gain of the year. The Dow Jones, the S&P 500 and the NASDAQ all climbed approximately 3% back to pre-Brexit levels and are hovering within a few percentage points of record highs. World markets also performed well in spite of the worries surrounding BREXIT. The FTSE 100 (an index of the largest stocks listed on the London Stock Exchange) Index gained 6.70%. The Nikkei 225 rose 4.89% and the Shanghai Composite added 2.74%.
As one would expect, prices of less risky assets rose immediately following the U.K. vote. What is somewhat surprising is the higher prices held as the perceived risk stabilized. Global bond yields fell with many hitting all-time lows. The yield on the U.S. Treasury 10-year note closed at 1.45%. U.K. Government bond yields traded lower even after experiencing multiple downgrades by the ratings agencies. The yield on the 10-year British gilt settled at 0.866%. Two-year British government bonds are flirting with joining the negative interest rate club. The moves underscore how powerful central banks have become across the government bond markets. Gold continued to shine again gaining 1.70%.
Following last week’s rally in stocks the backdrop for further positive progress becomes cloudy. Longer term BREXIT related risks remain, particularly in the U.K. and Europe. The major U.S. stock indexes are now facing overhead price resistance from April and above that the all-time highs established in May 2015. BREXIT questions will pressure equity valuations currently assuming a multiple at 17 times 2017 earnings.
The BREXIT vote is another example of the fruitlessness of attempting to forecast the markets’ direction or economic events, much less forward market multiples or one year forward corporate earnings. Most opinion polls and pundits assumed the “remain” camp would win the election only to be proven completely wrong sparking a global market rout losing $3 trillion in global equity value only to have the majority of the lost value recovered in the next 5 trading days. At Stadion our processes are designed to determine how much risk is currently in the market and to allocate portfolios based on that information with a focus on protecting client assets in periods of elevated risk.
The Stadion Managed Accounts risk objectives are managed using a “core/satellite (Flex)” approach. The core positions will comprise 40-60% of the portfolio and are invested in equity, fixed income and money market instruments with the strategic allocation becoming more risk averse as the risk tolerance of each fund changes. In allocating the objective’s Flex assets (the remaining 40-60% of each portfolio), Stadion uses a proprietary, rules-based weight-of-the-evidence model. With the recent weakness in the weight-of-the-evidence model, the Flex portion of the portfolios is partially invested in equity ETFs. The portfolios are overweight benchmark equity allocation at this time.
Past performance is no guarantee of future results. Investments are subject to risk, and any of Stadion’s investment strategies may lose money. The investment strategies presented are not appropriate for every investor and financial advisors should review the terms and conditions and risks involved. Stadion’s actively managed portfolios may underperform during bull markets. Some information contained herein was prepared by or obtained from sources that Stadion believes to be reliable. There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained. Any market prices are only indications of market values and are subject to change. The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock price. The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies. The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The Nikkei 225 is a price-weighted stock market index for the Tokyo Stock Exchange and is the most widely quoted average of Japanese equities. The FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The Shanghai Stock Exchange Composite (SHCOMP) Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. It is not possible to invest directly in indexes (like the S&P 500) which are unmanaged and do not incur fees and charges. The Sharpe ratio measures the excess return per unit of deviation, or risk. Any references to specific securities or market indexes are for informational purposes only. They are not intended as specific investment advice and should not be relied on for making investment decisions.
Past Performance is no guarantee of future results. Investments are subject to risk, and any of Stadion's investment strategies may lose money.