There is a LOT going on in fixed income markets right now, and for the most part, those developments are confusing. Treasury bonds had a huge rally, and then a little pull back, on worries about the economy. But at the same time, the riskiest bonds—high yield—have been doing very well even though they are the most likely to suffer in a recession. So where should investors have their money in fixed income? Long-dated municipal bonds might be one good idea. Advisors will be well aware of their tax exempt status, but what is interesting right now is that they appear a relative discount. 30-year munis have yields over 3%, well above Treasuries, making them look like a relative steal.
FINSUM: These seem like a good buy right now, especially with the rate outlook being so dovish.
US core retail prices came in soft in new data this week. The US core consumer price index, which excludes food and energy, rose 0.1% from the previous month and 2% from a year earlier in March. The readings both underperformed expectations, but are not considered indicative of a recession or any real economic trouble.
FINSUM: This data reinforces the idea that we are in a goldilocks moment with the economy. Let’s see if that continues. If it does, it sets up a nice environment for asset price growth.
The FINSUM team came across an interesting ETF recently, run by a team that we really liked. We always pay special attention to small caps because we think it is an area where strong research and a well defined strategy can create a lot of value. That is exactly the feeling we get with the LeggMason Small-Cap Quality Value ETF (SQLV). The fund is run by George Necakov, and experienced portfolio manager from Royce & Associates, themselves a specialist in small and microcap portfolio management that has been around since 1972. The fund seeks to create outperformance by tracking the results of an index made up of small cap stocks with relatively low valuations. The fund uses a multi-factor approach to choose companies with high profitability and low relative valuations. SQLV has an expense ratio of 60 bp.
FINSUM: This fund is still small but we like their approach and George seems like a very competent manager. Small cap value is an area where one needs a considered and labor-intensive approach and this ETF appears a great way to get some simple and reliable exposure.
Investors have been very worried about the yield curve’s recent inversion, and with good reason—an inversion is the most reliable indicator of a forthcoming recession. That said, there are two important factors to note. The first, of which most readers will be aware, is that it takes an average of 18 months for a recession to arrive once the curve inverts. However, the second factor, which is less well understood, is that the specific pairing of yield curves that are inverted also makes a difference. The media and market have been totally focused on how the 3-month and ten-year yield has inverted, but the best indicator historically has been the two-year and ten-year, which is still 18 basis points or so shy of an inversion.
FINSUM: The signal from the 2- and 10-year pairing has been a much better indicator. Accordingly, the inversion the market has been obsessing about may be less relevant.
Every investor seems to assume that this bull market is nearing its expiration date. Good things must come to an end, after all. However, Barron’s is arguing (rather adamantly) that this bull market could perhaps go on for another ten years. Reminding us of the old adage that bear markets don’t die of old age, Barron’s says there is just no sign of real weakness. “As far as the U.S. economy is concerned, there is no obvious sign that it has deteriorated”, says the publication. What about the yield curve? They say that is just an adjustment to tighter monetary conditions and not predictive of a recession in this case.
FINSUM: There is undoubtedly an element of superstition/intuition which is making investors feel like this bull run must come to an end soon. But the reality is that the underlying conditions for that to happen may not be in place.