Income Report Card | September 2017

Author: Nathan Rowader
Date: September 12, 2017
Category: Asset Allocation, Financial Planning
Tags: , , , , , , , , , , ,

Potential Opportunities
for Income

  • Emerging Market Corporate Bonds
  • High-Yield Municipal Bonds
  • International Real Estate

Weaker Opportunities for Income

  • International Sovereign Bonds
  • Treasurys


Emerging Markets Show No Sign of Stopping

Global stocks had a decent month with the MSCI All Country World Index ending the month of August with a gain of 0.44%. However, nearly all this advance can be attributed to the emerging markets (EM). The MSCI Emerging Markets Index gained 2.23% for the month of August while the S&P 500 Index gained 0.31%, the MSCI Europe Index gained 0.06% and the MSCI Japan Index lost -0.05%. Small-cap stocks continue to have a rough time, as the Russell 2000 Index declined by -1.27% on the month. Because of the strong August performance, the MSCI Emerging Markets is up 28.29% year-to-date, nearly three times the gain of the S&P 500, which is up 11.93% in 2017. Last month, we discussed the impact of currency and that much of the gains in foreign stocks and bonds can be attributed to the rise of the euro and yen relative the dollar. Since this has been a key macro event driving foreign assets, it should be no surprise that August’s lackluster returns for foreign stocks was accompanied by a decline in the U.S. Dollar Index, which fell -0.21% for the month.

Bonds had a strong month in August as global bonds increased by 0.99% with a yield of 1.48%. U.S. high-yield municipal bonds led the bond market with a gain of 1.38% and, like EM stocks, emerging market bonds finished strong with an increase of 1.27% for the month of August. However, this alignment didn’t apply broadly to credit as U.S. high-yield bonds fell -0.04%. Sovereign bonds also posted a strong month with international sovereign gaining 1.05% and Treasurys gaining 1.08%. International sovereign bonds led the market overall and have posted a gain of 9.31% for the year, outperforming many segments of the stock market. In recent weeks, the yields on many sovereign bonds have fallen as investors seem to prefer the safety of government bonds as we enter the seasonally weak period for stocks. However, these bonds are currently yielding 0.67%, which leaves very little room for error and still makes it one of the most dangerous asset classes for income investors.


Seasonal Weakness

The S&P 500 hit an all-time high on August 8, then tried and failed to break that high on September 1, which is typically a sign of a potential correction. This event also ushers investors into a seasonally weak period for stocks. Since the S&P 500 began in 1957, the mean monthly return for the index in September—the worst month—is a loss of ‑0.16%, while October— the second worst month—has exhibited a mean monthly return of 0.08%. While this seems to indicate that a correction is probable, it isn’t likely to be a very big one. First, roughly 64% of the index members are trading above their respective 200-day moving averages and the number of new highs minus new lows is trending upward. This data seems to indicate that the overall stock market is still quite strong and any correction over the next two months is probably just a pullback in an ongoing bull market. Therefore, it makes sense that investors stay overweight stocks, but it wouldn’t hurt to take some profit off the table.

Bonds are a real puzzle at this point. As expected, the U.S. Federal Reserve has begun to raise rates and, also as expected, the short end of the curve has increased this year from 0.51% to 1.16% for 3-month T-bills. However, long-term rates have continued to slide lower and the curve has flattened substantially. For example, the 10-year U.S. Treasury has decreased this year from 2.44% to 2.19% and doesn’t appear to be stopping either. Earlier this year, many investors were focused on government policy as a key component driving market returns. The expectation was a unified White House and Congress would push ahead pro-growth policies such as reduction in taxes and infrastructure spending. This belief drove rates higher in November and December and kept the 10-year Treasury in a tight range of roughly 2.30%–2.60%. Following the failure of so-called “repeal and replace,” investors appeared to pivot away from pro-growth positioning and the 10-year Treasury fell into a new range of roughly 2.15%–2.40%. Further political turmoil has now pushed the rate even lower to nearly 2.00% in early September. The slide in rates is a bit surprising, but it is the flattening of the curve that is unique as cash rates are now closing in higher duration bond rates. Any type of market turbulence could trigger a flight to quality that might favor cash and therefore might even provide some opportunity for some appreciation in cash over long-term bonds. As we mentioned earlier, there doesn’t appear to be any meaningful economic risk on the horizon, so this scenario is not immediate, but it is worth noting.



As we enter the seasonally weak September and October, it is no surprise that some of the market data is kicking off contradictory signals (discussed previously). However, as a rule of thumb, it is a good idea to keep your portfolio consistent with the general trend of the market, which is still positive. The last reading from the JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) was at 53.9, indicating that the global economy is still in expansion. Most promising is the new high in the manufacturing component of the PMI survey. The increase in global stocks, particularly in emerging markets, has been driven by the idea of synchronous growth. In other words, economic expansion occurring simultaneously among many diverse economies. This synchronous growth is a somewhat unique experience as expansion since 2008-2009 has generally come at the cost of other economies. For example, as the U.S. aggressively engaged in financial easing, it chipped away at the competitive advantages of EM economies. So as the U.S. grew, it came at the cost of slowing the growth in places like China. Today though, as the developed world begins to slow and even eliminate financial easing, growth seems to have sprouted equally across the globe.

Given this fact, our outlook preferring emerging market stocks and credit still appears to be the right ticket for positioning your portfolio. International sovereign bonds continue to move higher, but it is dangerous ground for income investors. That party is still likely to end badly.


Who can make that straight, which He hath made crooked?*

Scientists at the Oregon Health & Science University have successfully genetically modified a human embryo. Though there are reports of successes in China, this feat is the first successful attempt in the United States. The new technique used a gene-editing tool known as CRISPR, which utilizes a complex arrangement of bacteria and snippets of virus DNA to permanently modify the genes. The experiment was unique in the number of embryos that were modified and the fact that it appears to have corrected defective genes that cause inherited diseases. Furthermore, earlier foreign studies resulted in partial adoption of the modified genes while the U.S. study appears to largely correct this issue.

*Ecclesiastes 7:13


To learn more about the methodology visit the Salient Partners blog posting at You can also follow us on Twitter at @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 Bond
Municipal Bonds Bloomberg Barclays U.S. Municipal Bond
High-Yield Municipal Bloomberg Barclays U.S. Municipal High Yield
U.S. High-Yield Corporate Bonds Bloomberg Barclays U.S. Corporate High-Yield Bond
Emerging Market Corporate Debt CS Emerging Markets Corporate Bond
Emerging Market Sovereign Debt Bloomberg Barclays EM Sovereign Bond
International Sovereign Debt Bloomberg Barclays Global Treasury ex-USD
Mortgages Bloomberg Barclays U.S. MBS
Short-Term Treasurys (Cash Proxy) Bloomberg Barclays U.S. Treasury 1-3 yr Term
U.S. Stocks S&P 500
International Stocks MSCI EAFE
Emerging Market Stocks MSCI Emerging Markets
U.S. Real Estate Dow Jones U.S. Real Estate
MLPs Alerian MLP Infrastructure
Preferred Stocks BofA Merrill Lynch Core Fixed Rate Preferred Securities
Utilities S&P 500 Utilities Sector
International Real Estate Dow Jones Global ex-U.S. 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.

Nic Millikan and Nathan J. Rowader are registered representatives of ALPS Distributors, Inc.

10-year U.S. Treasury is a debt obligation issued by the U.S. Treasury that has a term of more than one year but not more than 10 years.

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

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

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

Bloomberg Barclays U.S. Municipal Bond Index 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. Municipal High Yield Index measures the noninvestment-grade and nonrated U.S. dollar-denominated, fixed-rate, tax-exempt bond market within the 50 United States and four other qualifying regions (Washington D.C., Puerto Rico, Guam and the Virgin Islands).

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

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

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

CBOE Volatility Index is a popular measure of market risk and is constructed using the implied volatility of S&P 500 index options.

Consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. The percentage change in the CPI is a measure of inflation.

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.

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.

MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets.

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 Japan Index is a free float-adjusted market capitalization index that is designed to measure the equity performance of 85% of Japan’s large- and mid-cap segments.

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

NASDAQ-100 is a modified capitalization-weighted index that includes the largest nonfinancial U.S. and non-U.S. companies listed on the NASDAQ stock market across a variety of industries, such as retail, healthcare, telecommunications, wholesale trade, biotechnology and technology.

NYSE Advance/Decline Indicator is a technical indicator that charts the difference between the number of advancing stocks and declining stocks on the NYSE in a given market on a given day.

NYSE New Highs/Lows is a technical indicator that charts the highest and lowest prices over 52 weeks of NYSE stocks in a given market on a given day.

Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the investable U.S. equity market.

S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.

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.

U.S. Dollar Index is a measure of the value of the U.S. dollar relative to six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

Valuation is the process of determining the value of an asset or company based on earnings and the market value of assets.

VIX (the ticker symbol for the Chicago Board Options Exchange Volatility Index) is a popular measure of market risk and is constructed using the implied volatility of S&P 500 index options.

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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