Articles by Chun Wang Director of Multi-Asset Strategies

The stock market wealth effect has been direct and pronounced. But it’s been wearing off, with the subsequent rally after each Fed stimulus weaker than the previous one.

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The non-seasonally adjusted CPI jumped 0.6% in August, matching the market consensus.

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What is the Fed going to do if another risk event hits and the S&P goes down 15-20%? Pray?

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Inflation measures mostly lower than expected in July.

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Does The Market Have A Party Preference In The Presidential Election? Results are a wash, so investors might rethink their assumptions about party affiliation and market performance.

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The failed break-out to the upside on the U.S. 10-year yield fits our expectation of a range-bound but higher-volatility environment.

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Inflation measures mostly matched expectations in June.

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For central bank policy effectiveness, global economic growth, interest rates, and inflation. While lowered expectations are a good thing in the near term, long term return expectations for most asset classes should be lowered too.

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We remain optimistically cautious, as we believe the determination of the policy makers to prop up the market should not be underestimated, especially in an election year.

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How do we avoid volatility in a high Uncertainty/low conviction world? We compare a “bi-modal” portfolio of 50% Treasuries/50% High Yields with a “middle-of-the-road” portfolio of 100% Investment Grade Corporate bonds. The latter wins in both good and bad scenarios.

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1st half LT rate movements tracked cycle composite well, but we differ on the pattern in the second half. The “muddle through” pattern on the U.S. Composite Leading Indicator is more consistent with our view.

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Most inflation measures matched expectations in April.

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This new “Higher Risk” signal closed out the previous “Lower Risk” signal generated last December, and this measure is telling us it’s time to play a little defense.

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Going forward, at least in the near term, we think a good guide for the potential downside on U.S. interest rates might be the German bund yields.

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Inflation is still below the Fed’s target and near term pressure is only moderate. This gives the Fed some room to ease further if the economy falters.

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Whether it’s the start of a new bond bear market or not, there’s no need to rush... and why shorting bonds may not be the best idea, even during a bond bear market.

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In the near term, U.S. interest rates are expected to be range-bound, and we remain neutral on the U.S. yield curve. Bond Market Risk Aversion Index fell again in January, and remains on a “lower risk” signal.

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Bond Market Risk Aversion Index fell in December, resulting in a new “lower risk” signal that closed out the “higher risk” signal which occurred back in May. We are now cautiously optimistic.

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The Risk Aversion Index edged up during November. It is still on a “higher risk” signal. We will stay defensive and be patient. Higher quality assets within the fixed income space are favored.

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The Risk Aversion Index fell sharply during October. Despite the sharp drop in the index, it has not fallen enough to generate a new “lower risk” signal. Our take on the current reading  is “wait and see” with a bias towards lower risk.

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