Quant Funds Are Sticking With Cheap Stocks – and They’re Losing Big
Quant funds have had a hard time over the last year. Powered by stock characteristics, these quant funds have been losing to the fundamentally-driven active-managed funds. This is consistent with the idea that value investing has struggled since the theory behind many of these quant funds is value-centric. Given the need for secular growth given the slowing economy, this could be the new reality – something quant funds aren’t necessarily prepared for. Or, this could just be a meaningful trough in a long-term cycle overall. Either way, in the short run, we believe active management seems better equipped to respond to unconventional and unexpected signals.
The Federal Reserve Just Released Its ‘Dot Plot.’ It Shows More Chance of a Rate Cut
Since the financial crisis, central bank interest rate policy has been a major factor in driving market sentiment. But, the last few months have seemed irregularly so. The market is extremely keen on a rate cut this month and if it does not occur the reaction could be severe. Fortunately, the Fed’s dot plot has been trending lower in terms of expected rates – perhaps sending a message to the markets. In fact, the maximum expected fed-funds rate for 2020 has dropped by 1 percentage point since June, 2018. Even if it is all show, the dot-plot seems to imply that the Fed is unlikely to risk a policy mistake like they did in late 2018.
U.S. Consumer Debt is Now Breaching Levels Last Reached During the 2008 Financial Crisis
In the 3rd Q 2019, U.S. consumer debt hit $14 trillion (vs. $13 trillion during the financial crisis). One contributor that has expanded disproportionately is student loan debt. This makes sense, given that student loans have been a front-of-mind topic in recent political debates and seems to be a touchtone issue for millennials. This statistic raises the question: how close are we to a recession if consumer debt is this bad? However, the way in which consumers are managing the debt creates a major distinction between now and the financial crisis. While in 2008 there was a rise in loan delinquencies prior to the crisis, loan delinquencies have actually remained pretty mild (so far). Also, GDP growth is much stronger and unemployment rates much lower than they were around the time of the crisis. However, this is something to keep an eye on.
Tips for Spotting a U.S. Recession Before It Becomes Official
What do yield curves, credit conditions, business sentiment, and labor signs all have in common? They help indicate a recession . . . at least, in theory. An inverted yield curve has played a significant role in every recession. However the Fed’s quantitative easing programs might have actually dampened the curve’s predictive ability. Credit conditions are always important, especially for small and medium sized businesses. However, credit remains plentiful at attractive interest rates and sentiment has been steady and strong. Finally, labor demand is an important indicator but tends to appear more as an aftershock than as a predictive cautionary signal.
Is Value Investing Dead? It Might Be and Here’s What Killed It
In a nutshell, the Fed may have killed it. The quantitative easing program they adopted after 2008, made the premium for traditional value stocks shrink, thus making it more difficult for value investors to generate returns. When interest rates are low and liquidity plentiful, all asset prices rise (the “rising tide that lifts all boats”) and future growth is worth more. In fact, quantitative easing may have paused the mean-reversion process for growth’s advantage over value. Furthermore, tech “disruptors” have made the “moats” surrounding many value companies less sustainable.
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