Quantitative Insights

To understand the impact of catalytic narrative forces, we have to monitor the vital signs of the capital markets they affect. To analyze the big picture through the lenses of game theory and history, we must also examine the details through lenses like volatility, momentum, income, correlation and inflation. These are the indicators of systemic vitality and stress—the fine details we use to fine-tune our worldview. We hope they help you sharpen your understanding of the investable universe.

Author: Nathan J. Rowader
Date: May 25, 2017
Category: Quantitative Insights
Tags: commodities, risk, bonds, low volatility, stocks, bullish

Market volatility is mixed across various segments of the market. However, short-term volatility is largely below long-term volatility, which supports the bullish case for riskier assets such as stocks and bonds. While volatility did increase in many parts of the market, it still remains muted and therefore isn’t indicating any immediate changes in market condition.

Market volatility is an indicator of financial stress. Low or declining volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

See the Data »

Author: Nathan J. Rowader
Date: May 24, 2017
Category: Quantitative Insights
Tags: correlation, currencies, equities, bonds, active management, portfolio risk

Our Observations: Stocks, bonds and currencies are exhibiting correlations in the short term that are well below long-term correlations. This is an environment that should offer the opportunity for potential excess return. We think emerging market stocks and currencies may offer the opportunity to lower overall portfolio risk while potentially harvesting better returns.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

See the Data »

Momentum | May 23, 2017

Author: Nathan J. Rowader
Date: May 23, 2017
Category: Quantitative Insights
Tags: momentum, inflation, currencies, sell-off, Brazil, global bonds, emerging markets, stocks, credit

Our Observations: Despite the sell-off last Wednesday and the sell-off in Brazil, global markets are still embracing risk. Both short- and long-term indicators are strong across the emerging markets for both stocks and currencies. Additionally, short- and long-term indicators are still weak across global bonds, particularly on the long end. As a result, we continue to expect riskier assets such as stocks and credit to lead the market.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

See the Data »

Income Report Card | May 22, 2017

Author: Nathan J. Rowader
Date: May 22, 2017
Category: Quantitative Insights
Tags: fixed income, volatility, Treasurys, currencies, rates, risk assets, safe bonds, international sovereign bonds, income report card

Our Observations: Rates fell sharply last week with the 10-year Treasury closing at 2.23% close to the 2017 low. This has lowered the overall range between 2.40% and 2.20%. Despite the rally in Treasurys and other safe bonds, the report card doesn’t indicate any type of fundamental shift in expectations. We think it may be important to keep an eye on international sovereign bonds, which have performed very well as foreign currencies have rallied sharply over the past few weeks. Although currencies have rallied, their movements can be very volatile and we believe they do not fit in a well-diversified income portfolio.

See the Data »

Volatility | May 18, 2017

Author: Nathan J. Rowader
Date: May 18, 2017
Category: Quantitative Insights
Tags: commodities, inflation, risk, correction, rising rates, sensitivity, low volatility

Our Observations: Changes in the risk environment followed no particular pattern. Certain markets like Korea and Hong Kong increased in volatility while most European markets and the U.S. experienced a slight decrease in volatility. In general, risk in stock markets appears to be muted while risk in bonds, currencies, and commodities approaches the long-term volatility level. Here again, much of this is likely driven by rate policy and expected inflation so we think it will be important to monitor as the environment becomes clearer.

Market volatility is an indicator of financial stress. Low or declining volatility environments may indicate favorable periods for equity investments, whereas rising volatility periods may favor sovereign debt and developed market currency exposure.

See the Data »

Correlation | May 17, 2017

Author: Nathan J. Rowader
Date: May 17, 2017
Category: Quantitative Insights
Tags: correlation, inflation, equities, rate policy, active management

Our Observations: Correlations for stocks declined almost across the board, which improved the situation for active stock pickers. However, nearly every other asset saw increases in their correlation, especially those with a high degree of sensitivity toward global rates. We think this could indicate a resurgence in the rate and inflation driven market that has made up most of the year’s key winners and losers. We believe this will be an important relationship to monitor as changes to rate policies continue to take shape.

The correlation figure measures how each asset return moves in relationship to the broader basket of asset returns listed on the X axis. When correlations are high or rising, it may indicate that economic movements and sentiment are driving the majority of returns, which could potentially make security selection challenging.

See the Data »

Momentum | May 16, 2017

Author: Nathan J. Rowader
Date: May 16, 2017
Category: Quantitative Insights
Tags: momentum, inflation, sell-off, bonds, emerging markets equities, risk-on market

Our Observations: We think this week is a textbook illustration of a risk on market. The biggest gainers were in the emerging markets and Japan while long-dated bonds in Europe and the U.S. were among the biggest losers. It appears that the fears of a larger sell-off have subsided and many investors are preferring to take on risk in their portfolios.

Momentum measures the rate of acceleration, either positive or negative, in a security’s price and may indicate which markets are positioned for gains or losses. Investing based on momentum entails establishing long positions in securities with positive recent returns and short positions in those with negative recent returns. Momentum in asset classes may illustrate the development of trends in the market.

See the Data »

Income Report Card | May 15, 2017

Author: Nathan J. Rowader
Date: May 15, 2017
Category: Quantitative Insights
Tags: fixed income, volatility, correction, Treasurys, rates, risk assets, portfolio construction, risk management

Our Observations: The 10-year Treasury ended the week at 2.33%, inside the 30 basis points range that has held for much of the year. It appears that the appetite for risky assets, i.e. stocks and credit, has returned after the minor sell-off in April. We also remain in a historically low level of market volatility. We think it is often difficult to navigate these periods of uncertainty, as history tells us the low levels of volatility should give way to high-pressure selling. However, periods of low volatility may deliver potentially strong returns while everyone waits for the change in market risk. In these times, we think it is important to stay vigilant and rely on risk management practices to guide portfolio construction.

See the Data »