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AAM Viewpoints – Anomalies & Normalcy of 2018: Foreshadowing 2019


“Time moves in one direction, memory in another.” – William Gibson

The events in 2018 may have felt unprecedented to many, and in some cases, they are correct. However, it was also a year which represented a normal chaos in many others. We should always remind ourselves that we are heavily influenced by negativity bias wherein we spend most of our time focusing on negative events or fears such that it requires five positive events to offset one negative one.

Here is a list of anomalies and abnormalities from 2018 and gauge where it may lead us moving forward:

  • The most dynamic metric of 2018 was provided by Deutsche Bank and the assets they follow with their returns annually. In 2018, the highest percentage of assets had a negative return standing at 89% as mid-November. This follows the historic year of 2017 when the lowest percentage of assets they followed had a negative return when it came in at 1%. This reversion and potential for a reversion back to a much lower percentage of negative performing assets in 2019 should be a high priority for year-end meetings with clients.
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  • The amount of central bank assets for the United States, Japan, China and Europe came in to 2018 at an all-time high of just under $20.5 trillion.
  • According to Goldman Sachs the amount of Algo trading started the year at all-time highs for equities, futures, options, foreign currency and fixed income. While the United States sees the highest percentage (over 60%) of all trading, Europe Asia and Latin America are all seeing growth.
  • Perhaps the most abnormal component of the current markets is in the amount of negative yielding debt that still exists. The fact that an entity would purchase debt with a negative yield points to a collateral concern, a massive risk off play or a direct bet on underlying currency appreciating. While the global negative yielding debt hit an all-time high of $12.1 trillion in 2016, it still stands at $7.7 trillion currently. Note that this statistic has only been measured since 2010 as the thousands of years of certain records of debt instruments and yield never considered a debt instrument with fixed losses was relevant.
  • The underperformance of commodities has been at historic levels. The last six decades are showing that those who are concerned as much about risk as they are about reward may need to consider, or bolster, their allocations to the most basic of goods that are required for economic progress.
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  • We just hit an all-time high on a rolling four-quarter period in the amount of stock buybacks from U.S. companies. Through the end of the third quarter of 2018, U.S. companies have purchased $801 billion of their stock. Even as the market was hovering at all-time highs, nearly 2.5% of the equity markets cap was taken off the board. This number was obviously enhanced by the corporate tax cut for 2018 and favorable terms for repatriating large overseas cash holdings. For those wanting to put this in context, since 2007, we have seen nearly $6 trillion in market cap purchased by companies with less than $600 billion in IPOs (Initial Public Offerings) being issued. This also corresponds with the total number of publicly listed companies being near historic lows.
  • Household net worth is at an all-time high of $109 trillion. Total assets stand at $124.9 trillion and total debt came in at $15.9 trillion. While both are at all-time highs, the debt is only up 7.9% from its previous high benchmark set in 2008 and total assets are up 48% since the same level. The Great Recession of 2007-2009 greatly impacted households delivering and, despite headlines, very pragmatic levels of increasing debt on a macro scale.
  • The amount of investment grade corporate debt has risen to all-time highs of just over $5 trillion. Of this amount, half is rated at the lowest end of the investment grade scale (BBB). While this is an alarming amount, the corporate liquidity levels to handle this rising amount of interest has been just as impressive. While we don’t see the liquidity crunch that signals typical economic recessions anytime soon, the reaction to this large amount of debt may be more downward pricing on statements but not a spike from normal historic defaults during those strained periods.
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  • While markets and investors were concerned with the one-time surge in corporate fortunes from the tax cut, they should look at the real anomalies of the last 80 years. Deregulation, if continued or maintained can have a longer sustain stimulus on businesses. For the first time we saw largest decline in pages of the Federal Register occur without being induced by a recession, economic calamity or war.

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  • As a contrarian indicator, when earnings divergences occur between the United States and Emerging Markets, you often see an outperformance in the asset that had the least amount of expected earnings. While no chart is a guarantee of future returns, looking for anomalies often create opportunities for contrarian investors. 
    mlloyd5_121718
    Source: Bloomberg

The return of volatility is a normal reversion from a year when it was at an anemic level. As we point out in detail in our 2019 Investment Outlook, we don’t see any of the indicators pointing to a forthcoming recession or liquidity crunch. While we consider the news more positive than negative, we still would favor those assets with the best risk/reward profile. We have proposed more value over growth domestically with the value sectors performing at historic lows as compared to growth investments as shown by the performance of the S&P Growth to S&P Value metric.

As William Gibson stated, we often forget what happened and – more importantly – why it occurred when trying to remember events. Contrary to what our minds tell us, negative events and anomalies are far more common place than we expect. Running toward anomalies and not away from them has the potential to create tremendous reward scenarios for those with the fortitude for the longer term.

*Please note that this is the final Viewpoints commentary for 2018. Viewpoints will resume on Monday, January 14, 2019.

 

CRN: 2018-1203-7071R

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 www.aamlive.com.

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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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