Market Outlook April 2018

Market Outlook April 2018

Market Outlook April 2018

After a record high 2017, the volatility has finally returned. Last year the market experienced one of the highest risk-adjusted performances in recent history. In 2017 there were only 10 trading where the S&P 500 moved by more than 1% in either direction, with not a single trading day when it moved by more than 2%. In contrast, in the 61 trading days of Q1 of 2018, we had 26 days when the S&P 500 moved by more than 1% and 8 days where it changed by more than 2%.

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VIX Index Q1 2018

Market Outlook April 2018
VIX index Q1 2018. Source Yahoo Finance

The VIX Index, which measures the volatility of the S&P 500 started the year ar 9.77. It peaked at 37.33 and ended the quarter at 19.97.

Markets do not like uncertainty, and so far, Q1 had plenty of that. In the first 3 months of the year market landscape was dominated by news about rising inflation and higher interest rates, the Toys R Us bankruptcy, trade war talks and tariffs against China, and scandals related to Facebook user data privacy.

Except for Gold, all major market indices finished in the negative territory.

Index Q1 2018
S&P 500 -1.00%
Russell 2000 -0.18%
MSCI EAFE -0.90%
Barclays US Aggregate Bond Index -1.47%
Gold +1.73%

 

Fixed Income

Traditionally bonds have served as an anchor for equity markets. Over time stocks and US Treasury bond have shown a negative correlation. Usually, bonds would rise when stocks prices are falling as investors are moving to safer investments. However, in 2018 we observed a weakening of this relationship. There were numerous trading days when stocks and bonds were moving in the same direction.

On the other hand, despite rising interest rates, we see the lowest 10-year/2-year treasury spread since the October of 2007. The spread between the two treasury maturities was 0.47 as of March 29, 2018. While not definite, historically negative or flat spreads have preceded an economic recession.

Momentum

Momentum remained one of the most successful strategies of 2018 and reported +2.97%. Currently, this strategy is dominated by Technology, Financials, Industrials, and Consumer Cyclical stocks. Some of the big names include Microsoft, JP Morgan, Amazon, Intel, Bank of America, Boeing, CISCO, and Mastercard.

Value

Value stocks continued to disappoint and reported -3.73% return in the Q1 of 2018. Some of the biggest names in this strategy like Exxon Mobile, Wells Fargo, AT&T, Chevron, Verizon, Citigroup, Johnson & Johnson, DowDuPont and Wall-Mart fell close to or more than -10%. As many of these companies are high dividend payers, rising interest rates have decreased the interest of income-seeking investors in this segment of the market.

Small Cap

As small-cap stocks stayed on the sideline of the last year’s market rally, they were mostly unaffected by the recent market volatility.  Given that most small-cap stocks derive their revenue domestically, we expect them to benefit significantly from the lower tax rates and intensified trade war concerns.

Gold

Gold remained a solid investment choice in the Q1 of 2018. It was one of the few asset classes that reported modest gains. If the market continues to b volatile, we anticipate more upside potential for Gold.

 

Outlook

  • We anticipate that the market volatility will continue in the second quarter until many of the above issues get some level of clarification or resolution.
  • We expect that small and large-cap stocks with a strong domestic focus to benefit from the trade tariffs tension with China and other international partners
  • The actual impact of lower taxes on corporate earnings will be revealed in the second half of 2018 as Q3 and Q4 earnings will provide a clear picture of earnings net of accounting and tax adjustments.
  • Strong corporate earnings and revenue growth have the ability to decrease the current market volatility. However, weaker than expected earnings can have a dramatically opposite effect and drive down the already unstable markets.
  • If the Fed continues to hike their short-term lending rates and inflation rises permanently above 2%, we could see a further decline in bond prices.
  • Our strategy is to remain diversified across asset classes and focus on long-term risk-adjusted performance

 

If you have any questions about your existing investment portfolio or how to start investing for retirement and other financial goals, reach out to me at [email protected] or +925-448-9880.

About the author:

Stoyan Panayotov, CFA is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm based in Walnut Creek, CA. Babylon Wealth Management offers personalized wealth management and financial planning services to individuals and families.  To learn more visit our Private Client Services page here. Additionally, we offer Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans, and other institutional clients. To find out more visit our OCIO page here.

 

The Benefits of using an Outsourced Chief Investment Officer

The Benefits of using an Outsourced Chief Investment Officer

In today’s insights, we will discuss some of the key benefits of using an Outsourced Chief Investment Officer.  Outsourced Chief Investment Officer (OCIO) is a growing service where financial advisors, family offices, endowments, pension funds, and other institutions seek outside firms for help to manage their core assets. Employing an OCIO can be an essential step in improving the efficiency of the investment decision-making process by employing the resources and expertise of an outside firm.

In fact, the 2016 NACUBO – Commonfund study of endowments revealed that 43 percent of the respondents had substantially outsourced their investment management function, up significantly from 2010’s report of 34 percent. Eighty-four percent of the study participants reported using a consultant for various services related to investment management.

Managing growth

One of the most common reasons why clients seek our services is to manage their growing asset base. While fast growth is a good problem, it brings more responsibilities and higher investment and operational risk. For instance, one of our key clients increased their asset base by 400% within 12 months. In that short period, we created an infrastructure to integrate new incoming accounts into the existing portfolio structure. While at the same time, we worked on eliminating operational deficiencies and establishing an investment committee.

Asset complexity and customization

Organizations have unique investment goals and an appetite for risk.  We regularly observe customer portfolios with significant investment concentration and a need for diversification.  Additionally, we see that many organizations have specific tax or liquidity constraints that can hinder their investment decisions.  There is also a growing need for socially responsible and faith-based investing.  An outside CIO can help clients efficiently navigate through the ever-growing complexity of customized investments and financial decisions.

Asset Liability management

As of December 31, 2017, the average endowment surveyed by NACUBO-Commondund Study has generated a 10-year return of +4.6%. This return is substantially lower than their long-term target rate of 7%, which is necessary to support spending and operational cost. For a $10m foundation, this gap could result in a $3.9m asset shortfall in just 10 years and over $14m shortfall in 20-years.

Real-time oversight

Investment portfolios need real-time management.  Financial markets are risky and often move very fast. Our customers know that their complex portfolios require continuous supervision from experts who can monitor investment risks and take advantage of tactical opportunities.

Performance pressure

The rise of ETFs and low-cost index investing created enormous pressure on organizations to improve their returns. Our team of experts can establish a dynamic process for evaluating external managers and passive investment strategies. We are a firm believer of risk-adjusted performance. Therefore we continuously scan the investment universe for managers with an outstanding history of achieving risk-adjusted returns and recommend them to our clients.

Risk management

Identifying and understanding the risks in our clients’ portfolios is a critical element in our investment management process. A robust risk and trading system can make a huge difference in a volatile market environment. As OCIO, we can implement ongoing risk management using daily monitoring, hedge strategies, portfolio stress testing, and risk modeling.

Free up internal resources

Our clients often rely on an investment committee and small internal staff to operate and manage their assets.  Hiring a full-time portfolio manager can be a lengthy, challenging and often costly process. By engaging an external CIO, our clients can free up their already stretched internal resources and focus on their core services in a cost-effective way.

Accelerated investment process

In a dynamic market environment, many of our clients benefit massively from an accelerated investment process. Our OCIO service helps our clients make faster strategic and tactical investment decisions. We also assist in the timely implementation of portfolio infrastructure and operational tasks.

Fiduciary advice

Our clients highly appreciate the value of fiduciary advice aligned with their specific goals, needs, and objectives. As a fiduciary OCIO, we must provide advice, investment management and guidance in our clients’ best interest.

Open architecture

An outsourced CIO can implement an open architecture investment portfolio to allow for expanded investment options in all asset classes and categories. The open structure can lower cost and provide diversification.  With our ongoing investment due-diligence process, our customers can choose from a broad pool of investment options, including index funds, factor-based ETFs, and top-ranked portfolio managers.

Cost control

As OCIO, we can help clients reduce their overall investment management and administration cost. We often see clients locked in expensive investment management agreements or using high-cost mutual funds and fee-loaded strategies with lackluster performance. Our fiduciary client commitment allows us to evaluate a wide range of investment strategies and recommend those with lower costs and higher risk-adjusted returns.

 

About the author: Stoyan Panayotov, CFA, is the founder and CEO of Babylon Wealth Management, a fee-only investment advisory firm. Babylon Wealth Management offers highly customized Outsourced Chief Investment Officer services to professional advisors (RIAs), family offices, endowments, defined benefit plans and other institutional clients. To learn more, visit our OCIO page here.