Financial Professionals


A “Busy” Start to June


During the final moments of CNBC’s Halftime show on Friday, I suggested that this week could be one of the busiest for 2014. I wish the show had a few more minutes so I could have further explained. When I suggest “busy,” some may mistake that to mean an elevation in volatility. That is not how I define “busy.” 

For those who monitor the VIX, it closed at 11.40 on Friday, slightly above its 5-year low of 11.05 from March 2013 (Figure 1). Keep in mind, the VIX historically has spent time below 10, trading there on multiple occasions from late 2006 into the first few months of 2007 (Figure 2). So, cheap can become cheaper.

Over the weekend, I read a great note from Goldman Sachs which accurately noted that the consensus overwhelmingly expects 3% economic growth, rising earnings, rising bond yields, and a rising equity market. The intense “macro” week ahead should provide clarity on the accuracy of that consensus and provide a “busy” environment for investors to formulate second half strategies based on whether or not those conditions will come to fruition.

Year to date, the S&P 500® Index (Figure 3) has returned 4%. But it has been a confusing environment for investors, hedge funds, and portfolio managers as 2013 leaders such as the Nikkei (-10%), Russell 2000® Index (-2.5%), and Nasdaq 100 (+1.5%) have underperformed. Conversely, bond yields have fallen, and the utilities, health care, and energy sectors are leading the SPX higher.

Given the current environment, I expect investors should begin to place the importance of “balance” first and foremost in their portfolio strategies. It seems to me that the time has come to dismiss the “risk on/risk off” mentality. A particular asset class should not be “loved” or hated;” rather, there may finally be a balanced global environment that supports the need for all asset classes in one’s portfolio.

Think balance first and foremost because the performance of all asset classes over the past 17 months suggests the market is achieving a balance when valuing the major asset classes.

During the busy week ahead, let’s focus on the following trading activity for leading insight to the messages from this week’s heavy global macro data releases and events.

  1. The reaction of the eurocurrency (Figure 4) in the wake of Thursday’s ECB meeting

    The eurocurrency has most accurately telegraphed the direction for global equity markets since the early May ECB meeting. On May 8, the euro traded uncomfortably high at 1.3993, its highest level since late 2011. Subsequent May price action has witnessed the euro fall below the 200-day moving average of 1.3645. During that time frame, the SPX rallied from 1860 to a new all-time record of 1924.03. A declining euro is perceived as a favorable condition for global equity markets. 

  1. The equity performance of financial institutions

    The Financial Select ETF (XLF) (Figure 5) is the worst performing sector for the second quarter (+0.22%). All of the other nine major sectors have positive performance for the second quarter. During the quarter, the yield curve has continued to narrow and management is cautioning for weak trading revenue. However, there are some strong fundamentals for financial institutions that could be optimized with some clarity on domestic economic conditions. Today’s May ISM Manufacturing and Friday’s May Nonfarm Labor report could provide that clarity. Positive fundamentals for financial institutions such as strong balance sheets, credit growth, reserve releases and cost controls might finally come into focus.

The NBA and NHL finals are finally here, but don’t stay up too late watching. Investors may need their rest in the first few weeks of June.

Figure 1: VIX Volatility Index, June 2, 2009 to June 1, 2014

Source: Bloomberg

Figure 2: VIX Volatility Index, June 2004 to June 2014

Source: Bloomberg

Figure 3: Eurocurrency, June 2013 to June 2014

Source: Bloomberg

Figure 4: S&P 500 Index (SPX), Year to Date

Source: Bloomberg

Figure 5: XLF Financial Select ETF, Year to Date

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.