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By: Defred Folts III, Managing Partner, Chief Investment Strategist & Eric Biegeleisen, CFA, Managing Director, Research

SUMMARY

  • While U.S. equities (particularly large-cap growth equities such as the S&P 500 index) remain overvalued, other U.S. equity asset classes, as well as non-U.S. equities notably Developed Asia and Europe to a lesser extent exhibit more favorable valuation measures; however other headwinds remain. The outlook for Emerging Market equities remains uncertain due to the potential for slower growth in China.
  • With the continuing equity reflation, our research indicates the risk of interest rates rising shorter-term could lead to a decline in the value of longer duration bonds. Therefore, the model’s preference in fixed income is towards short-term U.S. Treasuries and short-term Credit.
  • Although Gold continues to have a positive outlook from low real yields (nominal yields less inflation), should nominal yields rise more quickly than inflation expectations, i.e., a rise in real rates, then gold could suffer a temporary setback. The outlook for Commodities remains somewhat negative even as the potential for a global economic slowdown have diminished somewhat in the near term.

OUTLOOK

Continued monetary stimulus from the Fed, including $60 billion per month in balance sheet expansion beginning in October, along with positive investor psychology have continued to propel equity markets higher. Currently U.S. equities (particularly large-cap growth equities such as the S&P 500 index) remain overvalued, as the S&P 500’s price-to-sales ratio nears an all-time high. Other U.S. equity asset classes, as well as non-U.S. equities notably Developed Asia and Europe to a lesser extent exhibit more favorable valuation measures. Combined with slightly favorable behavioral characteristics, our research indicates a favorable outlook for Developed Asian equities and relatively undervalued U.S. equities, i.e., an index that includes mid-cap size firms whose dividends have consistently appreciated over the last 20 years. However, our measure of flattening and/or inverted yield curves globally continues to represent a general headwind for all major equity asset classes. With regard to Emerging Market equities, the trade and tariff discussions that oscillate between de-escalation and re-escalation have continued to cloud the outlook for additional growth in China.

With the increased potential for an equity reflation, our research continues to indicate the risk of rising interest rates in the shorter-term that could lead to a decline in the value of longer duration bonds. Typically, as interest rates rise, the value of fixed income securities declines. Consequently, the model’s preference in fixed income remains towards short-term U.S. Treasuries and short-term Credit.

Although Gold continues to have a positive outlook from low real yields (nominal yields less inflation), if nominal yields were to rise more quickly than inflation expectations, i.e., a rise in real rates, then gold could suffer a temporary setback. Additionally, gold may also struggle should its perceived safehaven status be deemed unnecessary by investors if the U.S.-China tariff and trade tensions de-escalate. Despite the fears of a slowdown in global growth subsiding somewhat, the outlook for Commodities remains negative due to the still present risk of a China-specific slowdown in growth.

Short-Term Fixed Income & Cash remain reasonably attractive on an absolute yield basis and serve as dry powder for reinvestment into asset classes that display a catalyst and are undervalued.

ABOUT 3EDGE ASSET MANAGEMENT

3EDGE is a multi-asset investment management firm that utilizes a proprietary model to analyze market valuation metrics (long-term), economic forces (medium-term), and investor behavioral factors (shortterm) that we believe drive the global capital markets. Our team of professionals draws on decades of investment management experience and their research in quantitative methods, including system dynamics, machine learning, artificial intelligence, and multi-player game theory to seek to identify undervalued and overvalued asset classes across the globe that may be poised to enter a period of market outperformance or underperformance. While we aim to generate attractive risk-adjusted returns, we also prioritize risk-management in an effort to limit portfolio declines for our clients, particularly during periods of extreme market disruptions. Our clients include individuals, family offices, institutional investors, and registered investment advisors.

CHANGE TO ASSET ALLOCATION ACROSS MAJOR ASSET CLASSES (TRAILING 12 MONTHS)

3EDGE GROWTH STRATEGY

3EDGE TOTAL RETURN & ESG STRATEGIES

3EDGE CONSERVATIVE STRATEGY

 

DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of December 4, 2019. Allocations shown above reflect target allocations for the 3EDGE Growth, ESG, Total Return and Conservative Strategies (the “Strategies”) as of the date the allocation change was made and individual investor allocations may differ. This commentary does not constitute an offer to sell or solicitation of an offer to buy any securities. The opinions expressed in “View from the Edge” are those of Mr. Folts and Mr. Biegeleisen and are subject to change without notice in reaction to shifting market conditions. This commentary is not intended to provide personal investment advice and does not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including common stocks, fixed income, commodities and ETFs involve the risk of loss that investors should be prepared to bear. Investment in these Strategies entails substantial risks and there can be no assurance that the Strategies’ investment objectives will be achieved. Past performance may not be indicative of future results. *Short-Term Fixed Income and Cash includes cash, cash equivalents, money market funds, and fixed income funds with an average duration of 2 years or less. Intermediate-Term Fixed Income includes fixed income funds with an average duration of greater than 2 years and less than 10 years. Real Assets (Gold & Commodities) includes precious metals such as gold as well as investments that operate and derive much of their revenue in real assets, e.g., MLPs, metals and mining corporations, etc.