There is no change to the risk budget this month. For the moderate risk investor, the allocation between risk assets and bonds is unchanged at 50/50. There are no changes to the portfolio this month.
Growth and inflation expectations rose somewhat since last month’s update. The change is minor though and within the range of what we’ve seen in recent months. The most significant change from last month is the continued drop in the US Dollar as growth expectations for the rest of the world continue to outpace US expectations. The dollar has lost considerable luster since the beginning of this year when everyone thought it had nowhere to go but up. Absent some kind of legislative win from the Trump administration, I see no reason to think the trend is about to reverse although sentiment is getting a mite negative on the greenback.
The weak dollar is mostly having the impact on markets one would expect. International stock markets are outperforming which is nice since our portfolio is positioned to benefit from just such a trend. Gold and other commodities haven’t responded as positively but gold is at least up over the last six months. Commodities more generally are down on the year, mostly a reflection of the drop in crude prices. If the dollar keeps falling I would expect commodity performance to improve. Real estate, another real asset sensitive to dollar movements, is performing well both domestically and internationally.
But the real winners are stocks of all kinds with international markets leading the way. In my listing of single country ETFs the S&P 500 doesn’t break into the top 20 best performing markets in the 1,3,6 or 12 month rankings.
The dollar’s decline accelerated after Mario Draghi’s remarks last week and weak economic reports from the US. The dollar is being driven by the change in relative growth expectations between the US and the rest of the world. It is also being driven by expected changes in monetary policy with the Fed seemingly a bit more dovish and the ECB a bit more hawkish. One shouldn’t minimize either the impact of the current administration’s obvious desire for a cheaper currency. President Trump has said so explicitly while his Treasury Secretary has hinted, smirked and winked. As I’ve often said, Presidents usually get the dollar they want.
With the slight rise in interest rates since the last update, the interest sensitive assets that were leading fell back over the last month. Commodities actually led the pack over the last month, rebounding from recent lows. They are however, as noted above, still down on the year.
