Income Report Card | January 2017

Author: Nathan Rowader
Date: February 10, 2017
Category: Asset Allocation, Financial Planning
Tags: , , , , , , , ,

Potential Opportunities
for Income

  • Emerging Market
    Corporate Bonds
  • High Yield Corporate Bonds
  • High Yield Municipal Bonds

Weaker Opportunities for Income

  • International
    Sovereign Bonds
  • Treasurys


Recession in the Rear View Mirror

The foreign developed markets, as measured by the MSCI EAFE Index, increased by 3.44% in December, ending the year on a positive note. These markets outperformed U.S. stocks, as measured by the S&P 500, and the Emerging Markets, as measured by the MSCI EM Index, which increased by 1.98% and 0.05% respectively. Generally speaking, bonds continued their slide down, as measured by the Bloomberg Barclays Global Bond Aggregate Index, which declined by 0.46%. Bonds with more credit sensitivity, as measured by the Barclays US Corporate High-Yield Index, held up better increasing by 1.85% during the month of December.

Committee (FOMC) increased the Federal Funds Rate by 0.25% in December and signaled that there are likely three or more hikes coming in 2017. In addition, the JPMorgan Global Purchasing Manager’s Index increased for the third month in a row to 52.1. Numbers above 50 indicate that the economy is likely expanding and the index has been generally heading higher since March of 2016.

Both of these facts indicate that the global economy appears to be getting stronger and the likelihood of a recession is low. Additionally, an expanding economy will likely begin to generate inflation which will help Europe and Japan justify the slowing of quantitative easing and perhaps even lead to increases in interest rates.


A Bolder Case for Stocks

A combination of rising rates and a strong economy create an environment that is accommodative for stocks. While we would currently be underweight stocks we would continue to grow this position and will likely move into an overweight position over the next couple of months.

Investor sentiment is very high which is made obvious in the extremely low price volatility for stocks. When this is coupled with high valuations in the form of earnings multiples it is hard to get excited about stocks. There is very little evidence to support a bearish outlook. However, in the longer-term it is probably safe to say we are closer to the end of this bull market cycle than the beginning.


Rising Rate, Expanding Global Growth

Assuming you believe the case for economic growth highlighted above then which markets should benefit? As of right now, the least expensive markets are in the emerging markets including Russia, China, South Korea and India. Additionally, many of these same countries have the wind at their back with strong momentum. Meanwhile, some of the most expensive markets are developed countries such as the United Kingdom, France, Canada, Italy and Spain. Which are also exhibiting very weak momentum. A combination of poor valuation and a lack of investor enthusiasm usually spells trouble.

Additionally, it may simply just be time for emerging market outperformance. For the first time since 2013, the MSCI EM outperformed the MSCI World for the year. In the past, these types of cycles can be long in duration and very profitable for investors.

As indicated previously, rates are going up, and this is probably not just for the U.S. either. On the margin, the European Central Bank and Bank of England have started to slow down asset purchases so it is probably safe to assume that while the U.S. will lead the way in rising rates, the rest of the world will probably be dragged along. One of the best ways to reduce the impact from rising rates is to find safety in higher levels of income. The high level current income will help reduce the impact of capital loss due to falling bond prices.

Given this, high-yield bonds and emerging market corporates are one good option. Deregulation in the United States in energy and financials seems likely given the current political environment. These two sectors make up a large component of the high-yield bond space and fiscal policy appears to be putting some wind at the back of high-yield bonds. Additionally, the deregulation in energy could be a boon for oil prices which will benefit emerging market corporations as well. When coupled with a low probability of recession, these are probably relative winners among bonds.


Astronomers at the Max Planck Institute for Radio Astronomy have discovered that the center of the Milky Way galaxy is made up in part of chemicals that give raspberries their smell and rum its flavor.

So it appears that the center of our galaxy is just a raspberry daiquiri and maybe we are along for the ride in a giant galactic blender.


To learn more about the methodology read the Salient Partners Income Investing blog series Part 1 and Part 2. You can also follow us on Twitter @nrowader and @NicMillikan for live updates on the Income Report Card.

Report Card: Stocks

Report Card: Bonds

Complete Income
Report Card
U.S. Treasurys Bloomberg Barclays U.S. Treasury
U.S. Investment Grade Credit Bloomberg Barclays U.S. Credit
Municipal Bonds Bloomberg Barclays Municipal Bond
High-Yield Municipal Bloomberg Barclays Muni High Yield
U.S. High-Yield Corporate Bloomberg Barclays U.S. Corp High Yield
Emerging Market Corporate CS Emerging Markets Corporate Bond
Emerging Market Sovereign Bloomberg Barclays EM Sovereign
International Sovereign Bloomberg Barclays Global Treasury ex USD
Mortgages Bloomberg Barclays U.S. MBS
Short Term Treasurys (Cash Proxy) Bloomberg Barclays US Treasury 1-3 yr
U.S. Stocks S&P 500 Index
International Stocks MSCI EAFE
Emerging Market Stocks MSCI Emerging Markets
US Real Estate Dow Jones US Real Estate
MLPs Alerian MLP Infrastructure
Preferred Stocks BofA Merrill Lynch Fixed Rate Preferred Securities
Utilities S&P 500 Utilities Sector
International Real Estate Dow Jones Global Select ex US Real Estate Securities
EM Infrastructure MSCI EM Infrastructure


Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.

This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.

Nathan J. Rowader is a registered representative of ALPS Distributors, Inc.


Alerian MLP Index is the leading gauge of large- and mid-cap energy master limited partnerships (MLPs). The float- adjusted, capitalization-weighted index includes some of the most prominent companies and captures approximately 75% of available market capitalization.

Bloomberg Barclays EM Sovereign is a rules-based market- value weighted index engineered to measure the fixed-rate local currency sovereign bonds issued in emerging markets as identified by Bloomberg.

Bloomberg Barclays Global Treasury ex USD is an unmanaged index composed of those securities included in the Bloomberg Barclays Global Aggregate Bond Index that are Treasury securities, with the US excluded while hedging the currency back to the US dollar.

Bloomberg Barclays Municipal Bond covers the USD- denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment-grade, fixed-rate bond market, with index components for government and corporate securities, mortgage pass- through securities and asset-backed securities.

Bloomberg Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.

Bloomberg Barclays U.S. Credit is an index composed of corporate and non-corporate debt issues that are rated investment grade (Baa3/BBB) or higher.

Bloomberg Barclays U.S. MBS tracks the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).

Bloomberg Barclays U.S. Municipal Bond covers the USD-denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.

Bloomberg Barclays U.S. Treasury is an unmanaged index of public obligations of the U.S. Treasury with a remaining maturity of one year or more.

Bloomberg Barclays 1-3 Year U.S. Treasury Index is an unmanaged index of public obligations of the U.S. Treasury with a maturity between one and up to (but not including) three years.

BofA Merrill Lynch U.S. Preferred Stock Fixed Rate Index consists of investment-grade, fixed and fixed-to-floating rate U.S. dollar-denominated preferred securities.

Credit Suisse Emerging Market Corporate Bond Index consists of U.S. dollar-denominated fixed-income issues from Latin America, Eastern Europe and Asia.

Dow Jones Global ex-U.S. Select REIT Index measures the performance of equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded globally, excluding the U.S.

Dow Jones U.S. Real Estate Index measures the performance of the real estate industry of the U.S. equity market.

Emerging market is a country that has some characteristics of a developed market but does not meet all of the standards to be a developed market.

JPMorgan Global Manufacturing Purchasing Managers Index is a composite index that serves as a global economic indicator by measuring different business conditions in 24 countries, including global manufacturing output, new orders and employment across the global manufacturing sector.

Max drawdown is the percentage of loss that an asset incurs from its peak net asset value to its lowest value.

MSCI EAFE (Europe, Australasia and Far East) Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

MSCI Emerging Markets Infrastructure Index captures the global opportunity set of companies that are owners or operators of infrastructure assets.

MSCI World Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global developed markets.

S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.

Sharpe ratio is a ratio developed by Nobel laureate William F. Sharpe to measure how a fund performs relative to the risk it takes.

Standard deviation measures the degree to which a fund’s return varies from its previous returns or from the average of all similar funds.

Yield is the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost or on the U.S. government’s debt obligations.

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