What will it take for a bull market to resume?

After the S&P 500 gained 20% per year from 2009-2014, the stock market has been stuck in a frustrating sideways range for a year and a half now. Within that trading range, we have seen two double-digit declines and two double-digit rallies, all without moving the needle in terms of the overall trend.

What will it take to break out of this range, and for the bull market to resume? And what’s the endgame for all the central banks that keep trying to prop up the global economy, with increasingly more unconventional moves? Let’s explore.
Bottom line
After a huge run, the market needed a breather and that’s what we are getting. The 200% gain in the stock market since 2009 was not sustainable because it left the risk-reward ratio out of balance.

Historically, the annual return for the S&P 500 was 10% against an annualized volatility (or vol) of 15%.1 However, since the March 2009 low, the return has been closer to 20%, for more or less the same vol. In other words, investors have gotten twice as much return per unit of risk than what was historically possible.

Therefore, if history repeats, the return profile will need to normalize so it can get back in line with the volatility profile. This can happen through a prolonged sideways market, a price correction, or a combination of both. So far, we have gotten more of the former and less of the latter. Whether that will continue remains to be seen, but what’s important to remember is that the market doesn’t (and shouldn’t) go up in a straight line. Corrections are a normal part of the market cycle.
Three pillars
Let’s think about what this market needs in order to break out […]

Manage Volatility, Generate Income with Muni Bonds

Municipal bond funds may not be the most exciting investment, but they have been maintained their momentum in 2016, providing investors with steady and stable returns.

Fixed-income investors should take a second look at municipal bonds as they begin to fall behind Treasury bonds.

“While tax-exempt munis have lagged strong-performing Treasuries so far in 2016, that relative weakness could offer investors a compelling entry point — an opportunity to buy in at a lower valuation and capture the potential income advantage that the tax-exempt asset class has to offer,” according to Peter Hayes, Head of BlackRock Municipal Bonds Group.

Specifically, Hayes points to three factors that have fallen under the radar but still support the muni outlook, including attractive yields, high quality and diversification.

For starters, munis offer yield generation and provide investors an attractive level of income relative to other fixed-income assets in what will likely be a prolonged low-yield environment.

The municipal market also comes with high quality and low volatility traits. The asset category has experienced lower volatility than other bond categories and tends to be less affected by Federal Reserve rate uncertainty than high-quality taxable investments, like Treasuries. Moreover, credit risk remains low among the munis group, with 10-year cumulative default rates at 0.24% for municipal bonds, compared to 11.16% for corporates.

Lastly, munis provide portfolio diversification and hedge against equity risk. Bonds are showing diverging correlations to equity risk. Moreover, the asset may offer a hedge against other risks that could affect investment portfolios this year, including ongoing China economic concerns and volatile oil prices.

Source:  Max Chen


Investors Should Focus On Hitting Singles

It is a time-honored tradition in the world of investing to use sports clichés. Yes, it’s a cop out, a failure of collective imagination, but rather than fight it just now, we are going to jump on that bandwagon. And not just sports clichés; we’re going to embrace all clichés—after all, most clichés have a real kernel of truth. To wit, in this market, it is emphatically time not to swing for the fences, not to be a hero, not to go for the gold. It is a time, in short, to hit singles.

Singles are the most unglamorous of hits—no one gets awarded the singles crown at the end of the baseball season. And there are no famed money managers and investors who proudly tout their ability to generate rather modest returns consistently. We laud the outsized personalities and their gaudy results, and then gleefully lambaste them when they falter. Recall that Babe Ruth led the baseball world in both home runs and strikeouts.

Today’s financial landscape, however, is decidedly single-friendly. It is a low-rate, low-return, low-yield, and low-volatility world. Yes, there are, and absolutely will be, periods of intense volatility, as we saw in equities at the beginning of this year through February. But volatility, however you measure it, has been very low this past year in the aggregate. Except for a few brief spikes last year and the beginning of this year, the VIX (a common gauge and a trading vehicle to boot) has stayed consistently under 20 (which is quite low), while equities, as measured by the S&P 500, have not hit a new high in the past 12 months.

What’s an investor to do?

As we said a few months ago, these markets […]