Is the decline in bonds/rise in yields starting to make some of your older clients feel nervous?
It is for some of my advisor subscribers as many of them have told me they are now fielding questions about the bond market almost daily.
Happily, we have been able to help our advisor subscribers turn those nervous calls into opportunities to:
1) Show clients they weren’t surprised by this decline in bonds,
2) That they have a plan to protect portfolios, and
3) That they are on top of markets.
That analysis has helped our subscribers turn anxious calls into relationship-building conversations… and that ultimately leads to more assets and more referrals.
And, the reason we’ve helped our subscribers turn these nervous calls about bonds into opportunities is because on September in the paid edition of Advisor Cheat Sheet, we said that the 10-year yield broke a critical downtrend, and between technicals and less-dovish fundamentals, we cautioned we could be on the cusp of a major turn in the bond market.
Between that initial warning and subsequent updates, our paid subscribers weren’t blindsided by this move lower in bonds/move higher in rates.
But, just identifying the move isn’t useful if you don’t provide subscribers with practical and actionable ideas to either 1) Protect client portfolios or 2) Make money on the trend.
That’s why, also back on September, we included a “Higher Rate Playbook” comprised of four “plays” that would help advisors navigate 1) A declining bond market and 2) A “risk-off” decline across assets.
The former clearly has happened, and we’re concerned that the latter may be looming early in 2017 as bond yields have risen much faster than most thought possible in 2016.
Our job is to prepare our paid subscribers for all possible outcomes from a sector move like this, so they aren’t blindsided by a surprise.
That is why we send the full edition of Advisor Cheat Sheet to paid subscribers every week.
I learned from my time on the NYSE that if you want to really understand markets, you must watch them every single day, and it’s only by watching them every day that we can provide the accurate and consistent analysis our subscribers use to outperform markets and grow their AUM.
And, in today’s macro-driven environment, just following the stock market isn’t enough.
You also need to understand the trends in: Bonds, Commodities, Currencies and Economic Data, and that’s why we also include “need to know” analysis of those markets in our Report, so that subscribers have a “one stop shop” for their macro analysis.
Yesterday’s Fed meeting was a legitimate hawkish surprise, and understanding the implications for all assets in 2017 is critical to advisors and investors. We’ve included an excerpt of our FOMC Analysis as a courtesy.
Why the FOMC Was Hawkish (Two Reasons)
We believe there are two key takeaways from this Fed meeting:
First, the Fed is more concerned with inflation than we thought in September.
Second, it’s clear this new political paradigm is on the Fed’s mind, and it’s a hawkish influence.
Starting with the statement and projections (the dots) the key takeaway wasn’t just that the Fed upped its dots to reflect three hikes. Instead, it was why they upped the dots, and the reason is clear… inflation.
In yesterday’s statement, the Fed made three specific changes to its language that implied inflation was indeed accelerating. That means yesterday’s increase of the dots was in reaction to expected increases in inflation, which we take to further validate our call that inflation will be a major theme in markets as we enter 2017. So, from a positioning standpoint, despite the host of unknowns facing markets in 2017, higher inflation is something on which we can be relatively certain… so position accordingly.
Turning to the press conference, Yellen specifically said that employment conditions had returned to pre-crisis levels, and specifically said the Fed wasn’t trying to get the economy to “run hot.”
This was a surprise/shocking defense of Fed policy, and clearly meant to exhibit the Fed is not going to be blindly dovish going forward. Finally, Yellen said that large-scale fiscal stimulus for an economy that’s already at full employment would likely result in more Fed rate hikes.
This was some of the most direct commentary I’ve seen from Yellen, and the fact that it came at the same time as the likely political changes is too much of a coincidence. So, while the new administration/government may not influence the Fed directly, it’s clear that any large-scale stimulus will be met with more aggressive rate hikes by the Fed, which is obviously hawkish.
Going forward, markets have not priced in a materially more hawkish Fed. While yesterday’s meeting didn’t necessarily guarantee a hawkish FOMC in 2017, it did reinforce three major trends in the markets:
- A stronger dollar, 2. Potentially much higher interest rates and 3. Higher inflation.
Have a Plan In Place If Yields Keep Rising
Back on September 19th, we provided paid subscribers with our “Higher Rate Playbook” to help them navigate a potential decline in the bond market.
Since mid-September, that playbook has provided subscribers with 1) Specific, well-reasoned talking points regarding bond market strategy when talking with clients and prospects and 2) Helped advisors and investors who acted on the strategies outperform the markets.
Play #1: Get Short the Long End of the Yield Curve, and/or Reduce the Overall Duration in any Bond Ladders
We provided Three ETFs to Get “Short” the Long Bond (there are many ETFs to do this but this is a list of the most liquid and targeted): Strategy Update – The Average Return of those three ETFs since then is 18.11%.
What to Buy in the Bond Markets: Strategy Update – The one bond ETF that we did advise buying has relatively outperformed most bond indices, as it’s basically flat (including payouts) since then, compared to a more-than-11% decline in the 30-Year Treasury.
Play #2: Focus on Good (but not Great) Credit Quality in Corporates
Strategy Update – This “play” actually hasn’t worked so far, and the reason is simple: We didn’t anticipate back in September that a Trump victory would ignite a risk-on rally across assets, and support junk bonds (incidentally, we are a legitimate research firm and as such we don’t pretend we get everything right, but we do control and minimize risk).
However, junk bonds got hit hard yesterday following the Fed, and if Trumpenomics enthusiasm starts to fade over the coming weeks, junk bonds will get hit even harder.
How to Get Short Junk Bonds: Our short junk bonds ETF has declined 2% since then.
Play #3: Shift Exposure in US Stocks Out of “Yield Proxy Sectors.” (Know the difference between high-yielding sectors and truly defensive sectors)
Strategy Update – Sector selection has become very important, and knowing the difference between truly “defensive” sectors vs. sectors that just pay big dividends will matter for performance.
Our preferred defensive sector has outperformed more “yield proxy” sectors by over 1% since then.
Play #4: Get a General Hedge Against “Risk Off”
Strategy Update – For over a year now we’ve used a specific inverse ETF as a broad hedge against a risk-off move in stocks, as this ETF has direct, specific exposure to some of the weakest sectors of the market, and as such can cushion any broad declines in the markets (like we saw in August/December 2015 and in January/February 2016).
This specific hedge has returned 3% September, even with higher stock prices… and if we see a pullback in stocks, we think this ETF can significantly outperform.
Again, we provided these specific ETFs for our paid subscribers back in September, when we believed we were witnessing a significant turn in the bond market.
And, regardless of whether subscribers acted on these ideas, we still gave them multiple talking points to discuss with clients to show they were on top of markets with a plan to protect portfolios.
Subscribers have told us those talking points alone have led to more clients and more AUM.
If you don’t have a report that is going to give you the plain-spoken, practical analysis that will help you navigate the markets, and help you get positioned properly to outperform in 2017, then please consider a subscription to Advisor Cheat Sheet.
There is no penalty to cancel, no long-term commitment, and it costs less per month than one client lunch!
Because of the great response we have seen, I am continuing to extend a special offer to new subscribers of our full, weekly report that we call our “2-week grace period.”
If you subscribe to Advisor Cheat Sheet today, and after the first two weeks you are not completely satisfied, we will refund your first payment, in full, no questions asked.
Increased Market Volatility Will Be an Opportunity for the Informed Advisor In 2017
We aren’t market bears, but we have said consistently that things were going to be volatile in 2015 and into 2016, and we were right!
Over the next few months, the advisor who is able to confidently and directly tell their nervous clients what’s happening with the markets and why stocks are up or down, and what the outlook is beyond the near term (without having to call them back) will be able to retain more clients and close more prospects.
We view the next few months as a prime opportunity to help our paying subscribers grow their books of business and outperform markets by making sure that every week they know:
1) What’s driving markets…
2) What it means for all asset classes, and…
3) What to do with client portfolios.
We monitor all asset classes, break down complex topics, tell you what you need to know, and give you investment opportunities that can profit from these trends.
Subscriptions start at just $37 per month and with the option to cancel any time prior to the beginning of the next quarter, there’s simply no reason why you shouldn’t subscribe to AdvisorCheatSheet right now.