Financial Professionals


Touchdown on the Opening Drive


Pessimists generally flip the calendar into January with trepidation. Cold winter days, the delivery of holiday spending bills, or some excessive holiday weight discourages the view. Optimists generally greet the January calendar flip with enthusiasm for a new beginning, a list of goals to accomplish. As a sports fan, I offer the optimism of baseball’s February spring training and the crowning of a new Super Bowl champion.
I have always enjoyed greeting January through the optimist’s lens. However, I will acknowledge the hard part can be maintaining the optimism. Generally a strong start is very helpful. Get some confidence, wind at your back so to speak. Coming out of the blocks is so important. To borrow a football analogy, It’s almost like scoring a touchdown on your opening drive. That really seems to set a confident tone for the remainder of the game – or year.
We are only three days into a new trading year. But I will declare that a touchdown was scored on the first drive for the market. The S&P 500® Index is +2.8%, the Russell 2000® Index is +3.5%. That is not just “fiscal cliff euphoria;” it is something more than that. Well, what is it you might ask? To have an answer after only three days would be foolish.
But I am confident in the plan we crafted within the Q1 playbook, “It’s Remains A Bond Friendly World,” and the investment themes. The focus of the Q1 playbook was potential changes in fund flows, global allocations, and pure mathematical economic evidence. In the early days of 2013, it is clear that there is change underway in each of those conditions which, if maintained, places a very strong foundation in place for non-Treasury assets in 2013.
In no particular order, let me offer some observations on the market’s strong “opening drive”….
1.  The noise surrounding the fiscal cliff since the presidential election has been an excellent reeducation process for me in smoothing out the noise. For 2013, I view an investor’s ability to ignore noise as incredibly important to achieving strong portfolio performance. Be steady, calm, and have less portfolio turnover.
2.  I view the current dialogue as to when the Fed will end its asset purchase program and its effect on the equity market as noise. Reversing monetary policy would be motivated by an improving growth outlook. Markets over time, maybe not in the moment, will favorably digest growth accelerating and the Fed ending its balance sheet expansion.
3.  During the past week manufacturing readings improved in China to 50.6; in South Korea to 50.1 from 48.2 last month; and in the United Kingdom to 51.4 from 49.1 last month.
4.  In the U.S., ISM Non-Manufacturing continues to surprise higher at 56.1 vs. 54.7 last month.   
5.  Correlations are changing, which is favorable. The SPX was +2.8% even as the U.S. dollar rose 0.92%, Apple declined 0.97%, and commodities all lagged the SPX. The two commodity currencies, Australian dollar & Canadian dollar, each rose despite broad commodity weakness.
6.  I suspect investors are becoming immune to political discourse in D.C. Yes, we will have a contentious debt ceiling debate but with the VIX near a five-year low at 13.83, investors have plenty of portfolio protection available in the options market.
7.  The Japanese yen, according to script, declined another 1.59% this week
8.  Lastly, the sharp decline in gold, -1.61% on the week, and rise in Treasury yields from 1.7% to 1.90% are both indicative of an improving environment for the SPX.
It is a strong start for 2013. Definitely a touchdown on the opening drive. Plenty of grand declarations regarding particular asset classes have been offered after this week’s strong performance. After three days, I will not offer any, other than to suggest you continue focusing on smoothing out the noise and sticking to the playbook.
Some charts to review….
S&P 500 Index (SPX) approaches its highest level since September 2012

Source: Bloomberg
Russell 2000 Index (RTY) trades to an all-time high on Friday, January 4, 2013

Source: Bloomberg
U.S. 10-Year Treasury trades to a 7-month high yield

Source: Bloomberg
China PMI at 50.6, suggesting an August 2012 trough

Source: Bloomberg
U.S. ISM Non-Manufacturing reaches its highest level since March 2012

Source: Bloomberg
VIX trades near a 5-year low

Source: Bloomberg
Japanese yen continues to decline and act as the funding currency for a global carry trade

Source: Bloomberg
Gold prior 52 weeks

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.