Quick cryptocurrency quiz. Virtually circle a correct answer. Only one, or maybe four, choices can be right. Mark your answer to eight decimal places.
- A currency
- An equity
- A social network
- Internet gold
- A way to get fired
The definitive answer is we have no idea if any, or all, of these are correct. From where we sit, Bitcoin is a mysterious payment system nobody understands, created by a mysterious entity nobody has ever seen, and mysteriously managed by, well, nobody. Sounds like a terrific idea. At least until it doesn’t.
“This is the greatest technology since the Internet. This is a sociological transformation, it’s a movement.’’ Tim Draper, venture capital investor
Mystifyingly enough, evidence is mounting that Wall Street is warming to the digital token thing. For reasons lost totally on folks like Warren Buffet, the great Goldman Sachs said it’s considering setting up a trading operation for digital currencies. And exchange operator CME Group announced plans for a Bitcoin futures contract.
“Bitcoin is the very definition of a bubble.” Tidjane Thiam, Credit Suisse Group AG Chief Executive
And volatile Bitcoin price are. Six years ago, a token was valued at $2. Three years ago, it was $300. Last week, the bewildering digital currency – following a nonsensical gain of more than 600% just this year – topped $7,000 for the first time. By way of confusing comparison, Bitcoin over the past 15 months has surged almost eight times as much as the tech-heavy NASDAQ did in the final 15 months of the tech bubble.
“It’s worse than tulip bulbs, it won’t end well. Someone is going to get killed.” Jamie Dimon, JPMorgan Chase CEO
The argument goes that Bitcoin is an elegant and modern replacement for the entire concept of money, and that its value comes from the way it simplifies the exchange of goods and services. Maybe it is. But while we contemplate that incredibility, “entrepreneurs” around the word are flooding the market with Bitcoin copycats – more than 1,270 digital coins or tokens are now available, with a total value of a couple gazillion dollars.
The Dutch were wild about the tulip plant when the Ottoman Empire introduced it to the Continent almost 400 years ago. At least until they weren’t.
What the equity markets have been doing…
Following a relentless eight-week march higher, equities finally took a breather this period. Stocks of the small-cap variety, which tend to benefit most from faster U.S. growth, seemed to show the most weariness. Among the sectors, Financials underperformed amid diminishing hope for tax cuts, while Consumer Staples benefited from investors’ growing defensiveness and Energy stocks profited from rising oil prices.
With little activity to follow on the economic calendar, traders looked to less quantitative happenings like tax reform for direction. On the whole, they found little to like. As prospects for any real congressional action on taxes continued to diminish, so, too, did any real enthusiasm for the markets. Large-cap indexes took a good hit on Thursday following the Senate’s attempt to draft a plan, and never really regained momentum.
|INDEX||Friday’s Close||One-Week Point Change||Year-to-Date Change|
What the fixed income markets have been doing…
The scarcity of economic data left most fixed income investments largely unchanged for the period. Treasuries and investment-grade corporates went sideways despite good demand, while municipals acted only a little better amid the talk of tax changes. Many of the House proposals, not least of which eliminating the deductibility of revenue bonds, would substantially narrow the playing field for muni investors. Action was a little more interesting in the high yield market, where a number of sectors were a drag on the performance.
|FIXED INCOME||Period||YTD||12 Months||Yield|
|U.S. Investment Grade||0.1%||5.0%||4.5%||3.3%|
|U.S. High Yield||0.5%||6.6%||9.1%||5.8%|
What Fund Architects has been doing…
Market sentiment soured a little across last period, snapping an eight-week equity winning streak along the way. Overall, small caps and financials underperformed while defensive sectors and energy did well.
Global ETF Portfolio
While equity markets may be coming to earth a bit, our systematic approach to investing keeps us fully invested. For our part, we maintained our overweights to Global Materials (MXI) and Global Industrials (EXI) in the Portfolio for November. These sectors have shown strong risk-adjusted returns over the past several periods, and our Multi-Factor Ranking System has put them atop the rankings for two straight months.
Conservative Global ETF Portfolio
On the fixed income side, Convertible Bonds (CWB) once again topped our fixed income rankings. The upward trend in convertibles has been remarkably consistent – the position was first added in February and shows no signs of slowing down. Convertible bonds are more likely than their fixed income counterparts to participate in an equity upswing, which is why the trend has been so strong in this sector during 2017. Meanwhile, Emerging Markets Sovereign Debt (EMB/PCY) remained the second ranked position for another month.
Given the relentless run-up in stock valuations, we’re not at all surprised by the sectors that have moved to the tops our rankings. Nor are we too shocked to see the volatility component of our analysis on the rise a bit. If there is, in fact, a market correction or consolidation ahead of us, the going might get a little bumpy for some market participants. We’d like to think investors in the “Glass Box” constructed Fund Architect portfolios are better positioned for a smoother ride.
What the numbers are saying…
Snap’s maximum share-price decline after the Snapchat parent said its quarterly loss more than tripled and revenue fell short of forecasts
What the pundits have been saying…
“People who say this market has gone on too far forget that the NASDAQ went nowhere for 17 years.”
- Joseph Fahmy, Managing Director at Zor Capital, LLC
What people have been saying…
““We know what we need to do, and it’s showtime.”
- John Flannery, CEO, General Electric, on cutting the company’s dividend for only the second time since 1938 and divesting the remainder of the lighting business created by Thomas Edison
The views in this commentary are those of Fund Architects. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this commentary, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Fund Architects or any other investment professional. The information contained within this commentary should not be the sole determining factor for making investment decisions. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, you are encouraged to consult with Fund Architects. Information pertaining to Fund Architects advisory operations, services, and fees is set forth in Fund Architect current disclosure statement, a copy of which is available upon request. Fund Architects, LLC is an SEC Registered Investment Advisory Firm.