December, 2014: Despite Volatility, Dollar Strength Continues to push U. S. Equity Indexes Higher
Equity indexes continue higher despite several downward revisions in GDP across the globe including China, Japan and Europe. Although GDP forecasts have been revised downward in the U.S. as well, we are the only large global economy that appears to be done printing money and are also anticipating short term rates to begin rising mid to late next year. This in turn makes all assets denominated in the U.S. dollar attractive, as such an investment would appear poised to appreciate by both being in the strongest global economy and a currency that is appreciating vs a foreign investors' own currency. This trend in money flow to the U.S. continues to be picked up by our quant analysis, as we see the December reallocation continue to be very long U.S. equities and the U.S. dollar. PCM Absolute U.S. Sectors is long consumer staples, consumer discretionary, and technology. PCM U.S. Industries is now in consumer staples, food and beverage, aerospace and transportations.
The December reallocation of the Emerging Market Equity Index continued spread off with exposure to inverse emerging markets, while being long India and emerging Asia Pacific.
The strengthening dollar is also a contributing reason, albeit not the only reason, for the continued weakness in oil that we have seen recently. PCM Total Return and Stable Growth Plus both also have a heavy exposure to the U.S. equity sectors mentioned above, as well as to the U.S. dollar. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
The PCM Global Tactical Index is "all in" U. S. equities with exposure to broader U.S. equities, as well as consumer staples and discretionary, technology and industrials. The theme continues with the Alpha One Index also being long broad based U.S. equities. PCM Absolute Metals Index is invested 50% palladium, with the remaining 50% allocation in cash equivalent, while PCM Commodities Index is long livestock and cash equivalent.
The PCM US Bond Index is allocated amongst varying maturities in U. S. Treasuries and also inverse high yield corporates, while the PCM Absolute Bond Index is in 1-3 year U.S. Treasuries and 20 year U.S. Treasuries.
****Newly announced performance awards: PCM Index Strategy composites have again been recognized for performance by Informa Investment Solutions; this time for the 2nd quarter of 2014, as well as 1-year trailing performance and 3-year trailing performance. The PCM Absolute Bond strategy and the PCM Absolute Commodity strategy both won a "Top Gun" award for performance in their respective category for the 1-year trailing performance period, with the PCM Absolute Bond also winning the "Top Gun" award for 3-year trailing performance. The PCM Alpha 1 strategy was awarded the "Top Gun" performance award for the 1st quarter of 2014. We are very pleased to see these particular multi directional strategies being recognized, as the PCM Absolute Bond and PCM Alpha 1 are particularly timely for where we are in the current market cycle.
To view Morningstar Fact sheets of all of our index models, please visit our website at www.pcminvestment.com under the "indexes" tab.
By: Melissa Wieder, CFP®, Director Institutional Services
Collaborative insight provided by CIO Michael Chapman
The views and strategies described herein are for illustrative purposes only and may not be suitable for all investors. The information is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as investment advice or a recommendation for any specific PCM or other strategy, product or service. Investors should consult their financial advisor prior to making an investment decision. There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. This material contains the current opinions of the author(s) but not necessarily those of PCM and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Provident Capital Management, Inc, PCM and Absolute Return Index are trademarks or registered trademarks of Provident Capital Management, Inc., in the United States.©2013, PCM.
About "PCM Quant Coalescence"
Welcome to Provident's bi monthly "Quant Coalescence" communication. We suspect that many of you are no different than us. That is to say that when our quantitative models rebalance every 2 weeks for some indexes or once a month for other indexes, you sometimes find yourselves asking "What is behind a rotation into that ETF?" This communication is our opportunity to "unite for a common end" with our clients and partners; keeping you updated on our thoughts and perspectives. As you know, our indexes are based on an absolute approach: we strive to make money in up markets or down markets, while trying to greatly minimize loss in any market environment.
Our indexes are also quantitative, reflective of our systematic, unbiased and technical approach. Since our indexes are unbiased, the quantitative models would obviously at times rotate into positions that cause us to scratch our heads. Nevertheless, being so close to the analysis as it unfolds, allows us to quickly begin to validate the fundamental reasons behind the quantitative "following of the money." At other times, the trades are not validated right away; the story unfolds as the days pass. We have been very excited about many of these "validations" and "ah ha" moments. We had another "ah ha" moment when we decided that these insights would also be interesting to those who have entrusted us with their financial peace of mind. Our goal is to be short and to the point, specific to what is happening in our indexes rather than a lengthy macroeconomic perspective.