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What Worked for November 2015

Here’s a look at trends in November: Lower quality bonds dramatically under-performed investment grade bonds last month.<1>

  1. Why? Junk bond spreads troughed on November 4th. The strong labor report suggested the Fed would definitely tighten in December, which surprisingly hurt junk bonds more than Treasuries. Capitalization-weighted indices modestly beat equal-weighted indices with the same objective once again.<2>

  2. Why? The trend towards large companies continues. Asia and Europe were highly correlated once again.  This time, each declined just under -2%.<3>

  3. Why? Europe performed better in local currency, but lost that advantage translated to dollars. HEDJ had a very nice (+3.5%) month. Frontier markets slightly outperformed emerging markets, but both declined over 3%.<4>

  4. Why? World instability and lower commodity prices do not tend to favor developing markets. Hedged foreign funds decidedly beat un-hedged foreign funds<5>

  5. Why? The dollar was very strong on the belief that the Fed would raise rates on Dec. 16th and Draghi would extend QE on Dec. 4. Small cap companies edged out mid-size companies in performance.<6>  The difference widened from 30 bp in October to over 120 bp in November.  I don’t have a good idea as to why. Growth underperformed value by about 40 bp in November, but leads it by 860 bp year-to-date.<7>  I would suggest, therefore, that one not read too much into November’s result. High quality companies slightly trailed lower quality companies, but the former still enjoys a 3.8% advantage year to date.<8>  Outperformance of lower quality companies tend to indicate that the bull market is healthy, because higher beta is being rewarded. Notes on Asset Allocation November was depressingly similar to May and a good deal of 2014 in that U.S. stocks<9> grinded out a small gain, but a diversified portfolio that included bonds and foreign stocks lost ground, because the decline in the latter two asset classes more than offset the fractional U.S. stock gain.  Financial stocks have done relatively well because the market believes rising interest rates will help banks earn more.  Technology has been the second best sector because tech stocks are thought to be interest rate insensitive.  Utilities and consumer staples have performed the worst because they have stable but slow growing businesses and as such are the most likely to use leverage to improve returns.  Wherever there is leverage, higher interest rates are a problem. So how do we interpret this? I have almost nothing to add to what I said last month about a long-in-the-tooth bull market.  Technically, the trend is up but investors have shown no enthusiasm for challenging the May 21 all- time highs.  Probably the most intriguing play is hedged European equities on the idea that Draghi’s moves are going to continue to lift those markets in local currency terms. <1> Source: US High Yield BB Option Adjusted Spread as per <2> Source: SnP 500 Equal Weight vs. S&P 500 Capitalization weighted as per Morningstar <3> Source: MSCI Asia v MSCI Europe as per Morningstar <4> Source: MSCI Frontier Emerging Markets versus MSCI Emerging Market as per Morningstar <5> Source: MSCI World ex US USD vs MSCI World ex US Local Currency as per Morningstar <6> Source: S&P 400 vs. S&P 600 as per Morningstar <7> Source: S&P Growth v S&P Value as per Morningstar <8> Source:  S&P 500 High Quality versus S&P 500 Low Quality as per Morningstar <9> S&P 500

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