Emerging markets are vulnerable to the marginal tightening of U.S. monetary policy, we believe, caused by the reduction in bond purchases by the Fed. In December, the Fed announced it would reduce its $85-billion-per-month bond-purchase program by $10 billion beginning in January. Although the Fed describes the reduction as less accommodation — rather than marginal
U.S. GDP growth during the recovery, underway since the middle of 2009, is among the weakest in recent history. It has averaged a little over 2% for the past four years, well below the previous long-term trends of 3% to 3.5%. Amid this slow recovery, investors have been looking for the economy to shift to
Given our relatively pessimistic outlook for commodities, we have favored a modest underweight stance for this asset class. Commodities generally behave with more momentum than reversion, and entered the current quarter coming off a very weak second quarter. Beyond the negative momentum, the weakness in emerging markets represents a very problematic signal for commodities. While
The year began with a flourish in stocks, which soared more than 10% on a mix of fundamentals and optimism. The Dow Jones Industrial Average and the S&P 500 Index set new records above levels they had last reached before the 2008 crisis. We view this advance somewhat skeptically, because the behavior of other asset
We are watching for a possible shift, although it is not yet evident, in the correlation between stocks and bonds, which measures how similarly or differently these asset classes perform. For the past 10 years, this correlation has been consistently negative — when stocks have struggled, bonds have done well, and vice versa (a correlation
As 2013 begins, we find that important changes are occurring in the correlation structure of markets that should shape investment strategy. The first important shift is a decline in the elevated correlations across all kinds of equities, which has been a hallmark of recent years. We measured elevated correlations across sectors, across country markets, and
As 2013 begins, we believe the most important question for investment strategy is whether the secular bear market for stocks has ended. Some evidence suggests it might have. Stock market returns in 2012 were very good, marking the fourth successive calendar year of gains in the United States. Three of the four years delivered double-digit
While investors may express commitment to a long-term view, all too often volatility can have a negative impact on behavior and turn potential gains into losses. This common response to uncertainty is demonstrated clearly in DALBAR’s 2012 Quantitative Analysis of Investor Behavior. In the study, DALBAR found that while the Standard & Poor’s 500 Index