By Joseph Calhoun of Alhambra
There hasn’t been a lot of change in our indicators since the last update and therefore, despite my discomfort with the altitude of this stock market, there are no changes to the Global Asset Allocation this month. For the moderate risk investor, the allocation between risk assets and bonds is unchanged at 50/50.
Bond markets moved around some during the last month but are today almost exactly where they finished at the last update. Other markets have moved to indicate a still ravenous appetite for risk but growth and inflation expectations are essentially unchanged. Stock and junk bond – I refuse to call them “high yield” with HYG yielding just a bit over 5% – investors seem quite a bit more sure of the outcome of the developing policy debate than the more sober Treasury participants. Commodities also moved a bit higher since the last update but the best performer was gold, not exactly a growth investment. It was very tempting to just move some out of stocks and into cash simply because valuations have gone completely off the reservation but our process requires something more than gut reaction to make a change. Momentum continues to favor stocks – US stocks mostly – and that has to be respected. Our allocation to stocks has already been reduced due to high valuations and absent more information I can’t justify moving the allocation even lower. I have decided though that I will consider making an intra-month move if I think it is necessary. That isn’t something I would normally do as I think one of the most common mistakes investors make is doing too much. But I think this market is so far beyond what is “normal” that one must make concessions to reality.
- Credit Spreads: Junk spreads continued to narrow, down another 7 basis points since the last update. They are still about 60 basis points from the lows of this cycle and nearly 150 from the lows of the last cycle. There is still plenty of room for improvement and there is no indication right now that spreads are about to reverse. The most likely culprit, if last year is a template, would be a fall in oil prices. While inventory would argue that might indeed be in the offing, momentum argues for the opposite. And as we’ve seen in the past, oil market moves owe a lot to the direction of the dollar which has recently found upside hard to come by.