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November Capital Markets Review: Stranger Things

12 December 2017

By Geremy van Arkel, CFA®

In last month’s commentary, I stated that I would like to convey the same old message every month; that capital markets continue their steady march higher and that volatility remains non-existent. This month, I am thankfully reporting more of the same. All of the current trends remain enforce. Global economic growth continues to chug along, inflation and interest rates remain low, earnings keep improving, and the volatility of the overall stock and bond markets still hovers near all-time lows.

Whether it’s out of need for more return as baby boomers near retirement, out of desire to keep up, or simply due to the seemingly endless oceans of liquidity, the investors’ appetite for risky assets remains strong. This month’s trigger was the progress being made to pass tax reform; which, by the way, shouldn’t come as a surprise: investors have been banking on tax reform since the election. With all of the accepted trends cemented in place, and a new excuse to buy more, asset prices, again, drove higher during the month. The trend is your friend, and November proved to be another solid month for Frontier investors with most Frontier strategies achieving above average returns and outperforming their benchmarks.

While increasing asset prices and economic progress coinciding with low interest rates and low inflation has been a boon for investors, there are some stranger things occurring that have left many investors scratching their heads. First off, there is the current paradoxical environment of rising asset prices and economic growth coinciding with low inflation and almost no movement in interest rates. Despite 8 years of the unprecedented global central bank stimulus of zero percent interest rates (ZIRP) and quantitative easing (OE), inflation remains globally below targets, and market-derived interest rates stay near record lows. Commodity prices, too, endure downward pressure.

Since the inception of the Fed’s stimulus in 2009, the S&P 500® Index has risen approximately 250%, while commodity prices, as measured by the Bloomberg Commodity Index, have declined 25%. Further along this line, the Barclays U.S. Treasury Long Index has gained 6.7% this year, despite its expected inverse relationship to economic growth, rising asset prices, and tightening Federal Reserve Board (Fed) policy. As the Fed raises interest rates, the market’s reaction is to push long-dated interest rates lower, flattening the yield curve. All of this has taken place while the yield on European high-yield bonds has dropped below the yield on 10-year US treasury bonds during the month. This is nothing short of a clear defiance of economic norms, and these outcomes were certainly not expected, nor predicted.

Secondly, the continued low volatility of stocks is a little bizarre. One of the main axioms of investing is that there is a positive relationship between return and risk. As the belief goes, to earn more return, investors must take on more risk. Prices are high because volatility is low. While the extreme low volatility that the S&P 500® Index is experiencing is a bit of a mystery, astute investors will recognize that these high returns are not occurring without future possible risk. It is all in how you define risk.

CBOE Volatility Index: VIX (Source:

The VIX measures short-term volatility of the S&P soo@ Index, the day-to-day price changes that have occurred in the past. If price changes are low, or all in the same direction (both the case now), then the volatility and VIX will be low. But it is worth noting that volatility is not a good gauge of future possible risk. Most investors are concerned with potential loss of money, which is not the same as historic volatility or price variation. The higher and more consistently prices rise, and the further they become stretched from economic reality, the higher the chance of future price loss. In an environment like now everyone thinks the market will continue to go up. Yet it is at precisely at these times that the chance of future loss is increasing.

And, then there are all those little snacks of information that float across my desk, or, more likely, rny computer screen. Maybe it is the abundance of information that we are all drowning under – all clickbait, no information – but there has been some strangeness this month worthy of mention. First off, if you think that house prices are high, how about the Salvator Mundi painting by Leonardo da Vinci selling tor $450 million dollars? Or Paul Newman’s Rolex watch, which sold for $17.8 million dollars. Yet the most interesting asset price story of them all has got to be Bitcoin, which now trades at over $16,000 for each coin. There is even a new crypto currency called Ethereum, and many others. As ethereal as this all may sound, there is a common theme to be found.

Bitcoin Price History (Source:

The strange incidences of low interest rates, or low volatility – or even Bitcoin’s meteoric rise – are all the results of investor risk-taking. Years of coordinated global central bank stimulus, concurring with a solid economy and a wealthy baby boomer demographic, has left investors flush with liquidity. Now all of this money needs a home. Investors start by bidding up the prices of safe assets like bonds, which drives interest rates further down. They then move on up the risk chain to stocks, driving those prices higher and higher. Houses, art, classic cars, crypto currencies, all become “investments”. As prices of all assets steadily rise, absorbing the liquidity, volatility falls. The higher asset prices go, the wealthier we all feel and the more we all spend. The longer it goes on, the more confident investors become, and the more risk they are willing to take. Before you know it, someone pays $17.8 million dollars for Paul Newman’s watch. Albeit, Paul Newman was one cool dude.

November Strategy Review

November was another great month for the world’s equity markets. It was also the 13th month in a row that both the S&P 500® Index and MSCI World Index had gains. That is the longest stretch of such consistent positive monthly returns since the World Index’s inception in 1970. Wow! Unlike early in the year when international stocks were doing much better than U.S. stocks (at least to U.S. dollar investors), November saw U.S. stocks up much more than international stocks. Perhaps the world’s investors like the idea of lower corporate taxes in the U.S. Fixed income prices and yields continued to be relatively stable in November, which is remarkable considering the big stock rally, but the Barclays Aggregate Bond Index did lose 0.13% in the month.

Frontier Asset Management’s Globally Diversified strategies also had solid positive returns in the month, and all but Capital Preservation easily beat their blended benchmarks. That is pretty remarkable considering we are positioned somewhat conservatively to help guard against a future market declines that might impact our ability to stay within our downside risk targets (When market prices are high and future return expectations are low, market declines can be exaggerated).

During the month, our conservative positioning did hurt relative performance modestly, but the funds used within the strategies performed extremely well, which led to the solid month.

Year-to-date performance of the Globally Diversified strategies was therefore enhanced and continues to be very good, particularly considering the across the board conservative posturing. Longer-term performance continues to be excellent relative to benchmarks for all commonly shown performance periods back to our strategies’ inception dates. Even one-year relative results now look pretty good as this November was added to the one-year results and last November was subtracted.

Frontier Asset Management’s unconstrained Alternative Strategies continued to perform well in November. Focused Opportunities was hurt somewhat by its heavy allocation to emerging markets stocks, which for a change were this month’s equity laggards, but even so outperformed the average hedge fund according to the HFRX Global Hedge Fund Index. Absolute Return and Absolute Return Plus easily outperformed their hedge fund benchmarks. Longer-term performance for these strategies continues to look extremely favorable relative to the hedge fund universe and alternative strategies available in mutual fund formats.

— Gary A. Miller, CFA®

Past performance is no guarantee of future returns. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Diversification does not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before in vesting consider fees and expenses.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third party sources believed to be reliable but it is not guaranteed and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Sources include the Wall Street Journal and Morningstar. All calculations by Frontier Asset Management, LLC.
Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
In reviewing any performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information.
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Index Description
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
HFRX Global*
Represents the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The index is weighted based on the distribution of assets in the global hedge fund industry. It is a trade-able index of actual hedge funds.
MSCI World Index
S&P 500®
A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MCSI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
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Frontier’s performance is available on our website –

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