Financial Industry Insights from Advisors Asset Management


AAM Viewpoints – The Subjectivity of the Markets

If you get the sense that the world appears in a constant state of disarray, you have some data to back up those anxieties.

  • The VIX (Volatility Index) has risen to as high as 37.32 from a low of 9.15…all in the span of one month earlier this year when the S&P 500 sold off 10.1%. This was last seen in 2015 when the S&P 500 had a max drawdown of 14.1%.
  • The Bank of America Merrill Lynch Treasury Volatility index had a spike as well, driven by fears of an overanxious Federal Reserve rate hike cycle, rising inflation and the constant DEFCON 1 headline of world economic collapse.
  • With the heightened risk of potential trade wars, the volatility of currencies also saw a spike earlier this year and has only recently been in a more subdued trading range. We believe this will likely change as the evolving quantitative easing cycle migrates to more of a tightening period.
  • Similar reactions in volatility have been seen in the Emerging Markets and the markets of the G7 (The Group of Seven is a group consisting of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) where the flight to safety in the first part of the year continues to have a resonating negative impact on overall trends.

The increases in market volatility are closely related to the heavy election cycle globally in 2018 with an increasing number of speculative headlines to garner attention from voters and media. I am guessing many will wish they had put off their vacation until fall once the advertisements hit critical mass. As we always attempt to do, we are using a bit of “ignorance” to those events that look transitory and attention given to them in the form of louder noise, and rather try to place context into how valid macro events and simple momentum play into the overall market in the next 12 months. Do not confuse the ignoring of most noise with ignorance, but rather putting current metrics in a context with both longer term objectivity and balancing the short-term relative nature of events with a subjective lens.

Many have been inquiring about the yield curve inversion and what it means. We have long been a proponent of the yield curve’s shape and what traditionally can be inferred from it. While the curve’s shape has traditionally taken a large percentage of the subjectivity out of it since the curve is intertwined and separated by maturity, for the most part, the current situation and the terra forming from the central banks has added to the complexity. As such, it appears we are suffering from “Premature Inversion Syndrome.”

The Axis of Liquidity (The Federal Reserve, Bank of Japan and European Central Bank) have shifted the physical landscape of global bond markets as well as the sentiment component of being a perpetual buyer in times of distress. With the sentiment component, this is perhaps the larger influence based upon auction metrics as the buyers may believe they have a perpetual put, to put a floor on potential losses.

The last two curve inversions of the 10-year and the 2-year occurred in 2000 and 2005. The balance sheet totals of these three banks assets stood at $2.35 trillion and $3.39 trillion respectively. Compare that to the current levels of $14.6 trillion and one can see why there might be a feeling of invincibility among sovereign debt holders. With the total assets up 6.2 times the 2000 inversion level and 4.3 times the 2005 level, one should also consider that sovereign debt issuance, though up considerably since 2000, have not risen to those levels.

  • U.S. government debt is up to 117% of GDP versus 53% in 2001.
  • European government debt-to-GDP is at 86.7% versus 70% in 2000.
  • The Bank of Japan government debt as a percentage of GDP now stands at 230% versus 131% in 2000.

What we take from this is that the massive easing has made the environment ripe for a quicker inversion than past conditions would have normally triggered. We typically have a year or more once an inversion takes place before a recession and or market top appear. The current environment may provide a couple of years before the direr event takes place with which you want to adjust your allocations prior.

We continue to see positives in the overall trend in the economy that reaffirms our original calls for the year. Gross Domestic Product came in at 4.1% with personal consumption up 4.00%. Company earnings continue to point to clear and positive short-term visibility and should see earnings continue throughout the year. The current market participants are confusing past euphoria levels with current cautious optimism and extrapolating them as the same emotion. This miscalculation often leads to more outperformance, rather than negative and is a healthy sign that skepticism keeps asset levels at reasonable prices. The large amount of underperformance in international equities continues to make them a more attractive place. We would use the recent weakness in the Emerging Markets as a more pressing investment and Europe overall as well.

The negative headlines and anxieties arising from them will not go away, however, eventually nearly all will be proven to be a hiccup and not a heart attack, in our opinion.


CRN: 2018-0702-6742 R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit



Effective, June 10, 2016, please note that Gene Peroni left Advisors Asset Management (AAM) to become President of Peroni Portfolio Advisors, Inc. Peroni Portfolio Advisors, Inc. ("PPA") is an investment advisor independent of AAM.


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