February, 2015: Volatility is Back!
Equity Indexes are experiencing a noticeable increase in volatility. Factors contributing to the increase in equity market volatility include: the Fed potentially raising rates, QE ending in the U.S., QE beginning in Europe, possibility of a Greek exit from the European Union, negative forward guidance from 80% of U.S. companies reporting, the possibility of deflation and what that means, indications that risk aversion is increasing, and a historical sell off in oil. Additionally, the market is at levels significantly higher than the long term mean.
The sell-off in oil is being debated amongst the bulls and the bears, with bulls believing lower oil will be a boost to consumer spending, while bears see it as a systemic warning sign of a slowing economy. U.S. Treasuries were up strong in January with the 10 year yield going below 1.7%. Both of PCM's bond indexes had a very strong month, as the 20 year U.S. Treasury yield fell below 1.70%, sending bond prices strongly higher. The PCM US Bond Index hit an all-time high for the month ending January 2015. It is allocated amongst varying maturities in U. S. Treasuries and also in investment grade corporates. The PCM Absolute Bond Index also hit an all-time high, as it remained in 20 year U.S. Treasuries and added government inflation linked bonds.
PCM Absolute U.S. Sectors enters 2015 with exposure to healthcare, consumer discretionary and utilities. PCM U.S. Industries is allocated to utilities, aerospace, consumer staples and REIT's. Both indexes are just a fraction off of all-time highs hit at the end of November.
The February reallocation of the Emerging Market Equity Index again continued with exposure to inverse emerging markets, with the remaining allocation going to cash equivalent.
Bonds, preferred stocks and conservative equity plays are all represented heavily in the PCM Total Return and Stable Growth Plus. Both Indexes also hold the U.S. dollar and exposure to Hong Kong and both experienced a positive return in January. (Please note that performance numbers on the website for indexes do not include dividends and are appropriately calculated sequentially.)
Despite equity indexes being down almost 3% in January, The PCM Global Tactical Index also held up very well and substantially outperformed the broader market with a positive return for the month. It goes into February allocated to U.S. Treasuries and preferred equities, utilities, and Hong Kong equity markets.
The Alpha One Index continued in U.S. government inflation linked bonds. The PCM Absolute Metals Index remained invested 50% in gold and 50% in silver, while PCM Commodities Index is 50% in gold and 50% in cash equivalent, as this index is seeing very substantial outperformance both last year and year to date vs its appropriate commodity index.
PCM Index Strategy composites have been recognized for performance by Informa Investment Solutions; most recently 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.