So I'd like to give my two cents as i feel a lot of these posts dig into the technicals of certain stocks and i feel like no one ever talks about the broad markets.
Background on me; i work on the sales desk of an investment firm on the east coast that manages 450 billion in assets and i directly cover the big wirehouses. What does this mean? Financial Advisors that manage hundreds of millions of dollars from UBS, Merrill Lynch, Morgan Stanley, Wells Fargo Advisors, Etc. call me up and ask me how to allocate money into their portfolios using our funds, SMAs and private placements. The following are the themes that the biggest FAs ask about the most.
Rising rates: obviously we are in a rising rate environment which means that fixed income has severe headwinds. We think that money should be allocated to fixed income that has low overall duration. The spread between a 2 and 10 year treasury is around 30-50 bps which means you are still being compensated well on the shorter part of the curve. digging into munis the following stats apply: a 5 year muni bond gets around 70% of the 30 year yield curve, a 10 year muni gets 80% of the yield curve and a 15 year bond gets 90% of the yield curve. this obviously shows the yield curve is flattening and the most highest yield per duration spot is around 5-10 years.
credit spreads: credit spreads are at all time lows. the amount of compensation between BBB to AAA is as low as it was in 2007. what does this mean? you should look for good yields in fixed income but you shouldn't take on too much credit risk when doing so.
Equities: equities are coming off a 10 year bull run. however, many technicals are pointing to the bull run continuing and the recession still being in the distant future. we prefer to look at corporate profits as an indicator to how profitable equities are. Though there has been recent volatility companies are still making profits and they are servicing their debts with defaults hovering at all time lows around 1-2%. once companies start defaulting on debt and high yield credit spreads start blowing out there should be a concern of equities going seriously negative. i would position in higher quality companies that have a low debt-equity ratio and have lower vol.
international/emerging markets: this area of the market is obviously troubled. a lot of this has to do with the strengthening dollar as well as the increased political risk from US tariffs on Europe and Asia/pacific. i think in time this area of the market will turn around as the US ease up ands as rates stop rising from the fed and we begin quantitate easing from our central bank.
a few broad allocation suggestions: get into higher quality equities in the case of a downturn of the market, specifically look at the downside capture of a certain fund/etf. de-risk from high yield credit into investment grade. if you have higher yielding credit, look to switch into floating rate loans which have a lower duration and are senior secured debt in the line of credit. if you seriously think there will be a recession i would look at moving your equity positions into government backed vehicles that have a yield around 3% and wait for the pullback. also finally dont freak out, this is normal market volatility, in the grand scheme of a market cycle you cannot be the fearful investor.
Submitted October 25, 2018 at 08:16PM by titty-boys https://ift.tt/2RfKFub
