Investors worldwide found themselves again stuck trying to interpret a trade war between the two largest world economies, the U.S. and China. The new development began this weekend with the U.S. executive authority renewing its threat to add an extra 25% in duties on $200 billion of Chinese imports. The justification behind this announcement was the frustration over the slow pace of progress in the trade negotiations between the two nations. Chinese authorities are expected to shortly announce equally strong retaliatory tariffs against the U.S. While most political experts believe there will be a trade deal signed in the medium term, that does not change the fact that markets don’t like uncertainty. And as such, we expect volatility to significantly increase in the short-term thus creating interesting opportunities for investors.
The CBOE Volatility Index (“VIX”) –a common measure of the stock market’s expectation of volatility– spiked over 50% in the last two trading sessions making it the largest increase this year. The current level just crossed the VIX long-term average of around 20, and the speed of the rise reminds us of last December. On December 4th, 2018 the VIX crossed 20 and the S&P 500 lost approximately 15% of its value over the next three weeks. It was not until December 24, 2018 that both the VIX and the S&P 500 began to recover. From there it took approximately five weeks for the market to recover the losses. That short-lived event created and destroyed wealth depending on where an investor was sitting and how he reacted. This is why it is important to have a systematic process in place that takes emotion out of the equation and evaluates opportunities based on data.
Innealta believes the investment world is best evaluated under our three-lenses approach (i.e., fundamental, macroeconomic, and behavioral). As of today, we still see opportunities in selected market segments. Fundamental data seems positive in the U.S. and in emerging markets, while developed markets lag. For example, year-over-year U.S. earnings growth at over 2% looks robust in the context of the current global economic conditions. And emerging markets have been putting forward economic reforms and policy stimuli that can be considered pro-equity market. Macroeconomic data remains neutral to positive. For example, in the U.S., GDP year-over-year growth is positive at 3.2%, unemployment is at historical lows at 3.6%, inflation is controlled at around 2%, and manufacturing indices point to continued expansion. Behavioral data, however, has started to deteriorate, with volatility being the latest negative signal. Overall, we believe the latest spike in volatility represents an opportunity, not a threat, for informed investors.
The Innealta Dynamic portfolios utilize our proprietary three-lenses approach to evaluate the risk-reward potential across different asset classes, regions, and sectors. We believe that data-driven decisions have the potential to improve investment decision-making and ultimately outcomes. For more information about our market views, commentaries, and investment solutions please contact us at consulting@innealtacapital.com
This material is for informational purposes and is intended to be used for educational and illustrative purposes only. It is not designed to cover every aspect of the relevant markets and is not intended to be used as a general guide to investing or as a source of any specific investment recommendation. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. This material does not constitute investment advice, nor is it a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. In preparing this material we have relied upon data supplied to us by third parties. The information has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by Innealta Capital, LLC as to its accuracy, completeness or correctness. Innealta Capital, LLC does not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regard to the results obtained from its use. Innealta Capital, LLC has no obligations to update any such information.
205-INN-05/07/2019
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