Our timely perspectives on key global economic forces and the long-term investment strategies to consider, highlighted by the Monthly Market Monitor.
Assessing whether Washington is ready to tackle tax reform
Andrew Friedman, July 2014
Everyone wants a simpler tax code and lower tax rates. But getting Democrats and Republicans to agree on the path to reform seems impossible. Circumstances – like the loss of U.S. jobs because of high corporate taxes – may eventually demand Congressional action.
Lack of corporate hubris means elongated cycle
Richard Bernstein, July 2014
Despite the general consensus that a bear market is on the horizon, we do not think investors or corporations are yet setting the stage for an end to this bull market and the start of the next economic recession.
Floating-rate loans are not just a rate hedge
Scott Page, Craig Russ, Christopher Remington; July 2014
The prospect of higher interest rates has many advisors and investors considering floating-rate loans. Because loans’ coupons regularly reset, these debt instruments can maintain their value even as rates rise. But the characteristics of loans, as well as their performance track record, suggest they may deserve a place in strategically allocated portfolios in any interest-rate climate.
Earn equity-like returns without equity-like risk
Michael Weilheimer, Steve Concannon, Will Reardon; July 2014
High-yield bonds offer investors the potential to earn total returns comparable with equities without the level of volatility stocks have. While many income investors are naturally concerned about the prospects of higher interest rates, high-yield bonds have a set of characteristics that may enable them to maintain their value even as rates rise.
What inning is the bull market in?
Edward J. Perkin, July 2014
Since the low of the bear market in March 2009, U.S. equities have been on a 5-year bull run. Investors naturally wonder how much longer this can last. To use a baseball metaphor commonly applied to the markets, they wonder what inning we are in. The answer depends on what “game” one is watching.
Reconsidering today’s bond market risks
Kathleen Gaffney, July 2014
Pursuing returns from the bond market’s traditional risks – such as interest-rate and credit-risk – has become quite expensive. Treasury bonds, which are the most sensitive to interest-rate risk, have low yields and high prices now. Corporate debt, which also has credit risk, is similarly high priced. Investors may be better served by avoiding these “systematic” risks (so-called because they tend to have a blanket effect across whole categories of bonds). Greater opportunities may lie in pursuing “idiosyncratic” risks that are unique to each issuer of income securities.
An allocation to currencies may provide income and lower an overall portfolio’s volatility
Michael Cirami, Eric Stein, John Baur, Matthew Murphy, Bradford Godfrey; July 2014
Most investors understand the benefits of diversification and the risks of owning just one security. But many overlook the benefits of broadening their currency exposure and have all their investments concentrated in the U.S. dollar. Investing in a mix of foreign currencies may lower the risks of an overall portfolio, provide additional sources of income and can potentially enable investors to pursue a wider array of opportunities around the world.
Country Allocation: The Primary Determinant of International Equity Returns
Marshall L. Stocker, June 2014
Macro-economic policy explains country-level equity returns
Marshall L. Stocker, June 2014
Edward Perkin is Eaton Vance’s new Chief Equity Investment Officer
In April 2014, Edward J. Perkin joined Eaton Vance as the firm’s new Chief Equity Investment Officer. He recently sat down for a Q&A to discuss his background, leadership style and vision for the Eaton Vance equity team, as well as his outlook on the stock market.
Are you managing volatility?...or is it managing you?
Research shows investors’ personal returns fall short of the equity markets’ actual returns because investors too often make the mistake of buying high and selling low. But there are several strategies investors and their advisors can draw on to take a more disciplined approach to investing.
Assessing the impact of the midterm primaries
Andrew H. Friedman, June 2014
The success of moderate Republicans in Senate primaries increases the possibility that the GOP can win a majority of the seats in the Senate. The defeat of House Majority Leader Eric Cantor by a Tea Party-supported candidate will likely result in the House’s Tea Party members being able to exert much greater influence on positions the House leadership takes.
Hexavest neutral on Japan
Frédéric Imbeault, June 2014
The policies of Japanese Prime Minister Shinzo Abe – known as “Abenomics” – succeeded in pushing the country out of recession and deflation. But further economic reforms are still needed, and other key economic and market indicators remain mixed.
Solving the Income Puzzle
Christopher Remington, Michael Cirami, Kathleen Gaffney, and Scott Page; July 2014
With interest rates at near historic lows, investors are starved for income. Government bonds and high-grade corporates have generally been the core of investors’ income portfolios, but yields on these bonds are minimal. Delivering a potential double whammy for investors, the prospect of rising interest rates could bring principal losses because the prices of bonds in these core sectors are highly sensitive to changes in interest rates. Diversifying into nontraditional income sectors may provide investors with greater income and lessen their exposure to interest-rate risk.
Bernstein: Emerging market debt seems risky
Richard Bernstein, June 2014
In their search for yield, investors may be overlooking the deteriorating fundamentals in the economies and currencies of a number of emerging market countries. Richard Bernstein believes the U.S. market may offer better, and less risky, opportunities for higher yield.
The appeal of high-yield munis may increase
Cynthia Clemson and Thomas Metzold, May 2014
This year’s tax season was a rude awakening for many investors. For high earners especially, the tax rates on investment income have risen substantially. Increased taxes, combined with historically low yields and the prospect of higher interest rates eroding bond values, have a posed a triple threat for investors. But high-yield municipal bonds may offer a way to address these challenges.
Worried about the downside?
Richard Bernstein, May 2014
In most investors’ minds, losing money is the biggest risk they fear. While many still seem unwilling to take on excessive risk with equities, their solution to managing risk seems to be broadening the number of asset classes they own. But looking at correlations, not the number of asset classes in a portfolio, may be the best way to seek protection from the downside risk of equities.
Floating-rate loan core value remains, despite headlines
Scott Page, Craig Russ, and Christopher Remington; May 2014
The bankruptcy of Energy Future Holdings, the company formerly known as TXU, made headlines, as has other seemingly cautionary developments in the floating-rate loan market. But Eaton Vance still believes there are plenty of opportunities in the loan market for cautious investors who do fundamental credit research.
Hexavest on the markets
Eaton Vance affiliate Hexavest employs a top-down investment approach, looking at three key factors – the macroeconomic environment, equity valuations and investor sentiment. While the global economy has been improving, indications of overvalued markets and bullish investors’ willingness to take on risk lead the firm to a cautious outlook for global equities.
How to tame an aging bull market
Bill Hackney, May 2014
The bull market that began in March 2009 is now 5 years old. We don’t see any signs that it will let up, even though economic growth remains low. With rallies this prolonged, managing risk becomes even more important. Active share, beta and downside capture ratio are three key measures advisors and investors can use to evaluate an asset manager’s ability to capture the opportunities and manage the risks associated with this type of market.
Puerto Rico: what investors should watch for next
Municipal Insight Committee, May 2014
In February, the three major credit ratings agencies (S&P, Moody’s and Fitch) downgraded Puerto Rico’s general obligation (GO) rating to below investment grade, primarily citing the territory’s difficulty in accessing capital markets, its heavy debt load and a continued decline in its economy.
Muni bonds’ appeal likely to be evident in 2014
Municipal Insight Committee, April 2014
2013 proved to be a difficult year for the municipal bond market with a few, high-profile negative news stories and fears that Fed actions could lead to higher interest rates. But 2014 offers a more promising scenario. Higher tax rates, in particular, are likely to cause more investors to realize the appeal of investing in tax-advantaged bonds.
Emerging markets may offer value
Kathleen Gaffney, April 2014
With market expectations that the Fed will raise U.S. interest rates sooner rather than later and increased geopolitical unrest around the globe, many investors are shying away from emerging markets. But careful investors may still find extra yield in these markets and an opportunity to diversify away from U.S. interest-rate risk.
How bad is your Tax Day hangover?
Municipal Insight Committee, April 2014
This tax season many investors in higher tax brackets were rudely awakened to the reality of paying 50% of their income in federal and state taxes. Given the new tax landscape, income municipal bonds may look more appealing than ever.
Consider equity funds' after-tax returns
With higher capital gains tax rates, investors in high tax brackets can particularly benefit from strategies that are mindful of the after-tax returns equities deliver.
A Classic Barometer
Richard Bernstein, April 2014
With the yield curve in the United States still steep by historical standards, there should be ample liquidity in the economy to fuel further growth. Generally yield curves in emerging markets, however, are either flat or inverted, a situation that could create liquidity issues and curb economic and profit growth in these markets.
Income Market Insight
Payson Swaffield, April 2014
Fans of NASCAR racing, and most other motorsports, know what it means when the yellow flag is being waved: proceed with caution. For investors in today’s credit markets, we believe that is an appropriate image to keep in mind. After five years of generationally low rates, investors are “stretching” for yield – that is, they are scooping up deals at yields that, in our opinion, barely compensate them for the risk.
Economic Insight: Fed policy goes back to the future
Thomas Luster, April 2014
We fully expected the strength the economy showed in late 2013 to carry over into 2014; however, that was simply was not the case. Instead, we saw weaker-than-expected economic data across a wide range of economic indicators.
In the coming weeks, we believe the data will confirm that severe winter weather patterns, slower global growth (especially in China) and a reduction of last year’s inventory build were worthy of blame for the loss of economic momentum in the first quarter.
Investing in the Wake of the “Great Moderation:” Floating-Rate Loans as a Strategic Allocation
Scott Page, Craig Russ, Christopher Remington; April 2014
Floating-rate loans deserve consideration as a strategic portfolio position today because they may help:
- Boost income in a low, flat-rate environment with yield potential that’s competitive with or greater than many longer-duration fixed-income investments.
- Protect fixed-income portfolios against a potential rising-rate scenario and the erosion of fixed-income values that would result.
- Reduce portfolio risk with historically near-zero duration and low correlation with other fixed-income sectors.
Have you looked at India lately?
Eric Stein, Patrick Campbell; March 2014
In our judgment, it’s time to remove India from the ranks of the so-called “Fragile Five” emerging-market countries. We believe the strong investment case to be made for India today underscores the importance of taking a country-by-country approach to emerging-market investing.
The Midterm Elections (And a Peek Toward 2016)
Andrew H. Friedman, March 2014
With fiscal deadlines out of the way for 2014, attention is now turning toward the 2014 midterm elections. This white paper covers a variety of Washington political matters: the reason for rampant partisanship in Washington and what it means going forward, what is likely to happen in the midterm elections and a glimpse toward the presidential election of 2016.
Michael Cirami on Ukraine: It May Just Be Spring Training for Putin’s Hardball Tactics
Michael Cirami, March 2014
Earlier this month, Michael Cirami, co-director of Eaton Vance’s Global Income Group, offered his views on the immediate crisis surrounding the seizure of Crimea by Russian and pro-Russian troops, having been in Kiev just two weeks prior. In this Viewpoint, he adds some perspective to how events have unfolded since and how they may going forward in the wake of that event.
Eaton Vance Viewpoints: Timothy Atwill on “Systematic Alpha” Investing
Timothy Atwill, March 2014
Timothy Atwill, CFA, Ph.D., Director – Research and Strategy for Parametric, discusses Parametric’s innovative investment approach — known as “systematic alpha” — and its application to emerging-market investing.
Emerging markets: fertile ground for country picking
Michael A. Cirami, Eric Stein, John R. Baur, Bradford Godfrey, Matthew F. Murphy, Jr.; March 2014
Given the variations among individual emerging countries in today’s environment, country-by-country differentiation is likely to remain key to successful emerging-market investing.
The American Industrial Renaissance Revisited
Richard Bernstein, Q1 2014
It remains unlikely that the United States will be the manufacturing powerhouse that it was during the 1950s and 1960s, but many factors are suggesting that the U.S. industrial sector will continue to gain market share.
Michael Cirami on the Ukraine Crisis
Michael Cirami, March 2014
Investors tend to ignore events that do not demand immediate attention. Unfortunately, this approach is no longer an option following the recent events taking place in the Ukraine. Michael Cirami, portfolio manager in Eaton Vance’s Global Income Group, was in Kiev the week before President Yanukovych was ousted. In the following interview, he shares his views on the crisis in this emerging market and its implications for investors.
Consider paying a premium for municipal bonds: Focus on yield to worst rather than a municipal bond’s price
Municipal Insight Committee, March 2014
- The price of a premium municipal bond should not be the sole determinant of value
- Yield to worst is a meaningful metric to help determine the value and risk of a premium municipal bond
- In rising rate environments, higher cash flows from a premium municipal bond may help to protect purchasing power
Market Share: The next secular investment theme
Richard Bernstein, Q1 2014
A myopic focus on profit margins may miss an important investment consideration. Whereas most investors remain fearful of margin compression, we prefer to search for an investment theme that could emerge if margins do indeed compress.
Equity Bubble? No.
Richard Bernstein, Q1 2014
A growing contingent of market observers is fearful that the U.S. equity market is in some sort of a bubble. We disagree completely with this notion. A strong market rally that many investors have missed is hardly sufficient grounds for a financial bubble.
Confronting the tax drag
- The impact of the “tax drag” on investor portfolios can be significant over long time frames, potentially consuming a quarter or more of every dollar earned by the average investor.
- As federal tax rates have risen for many investors, so too has the risk of losing a larger portion of one’s returns to taxes—highlighting the need for a tax-aware investment approach.
- Municipal and tax-advantaged bond strategies, tax-efficient equities and solutions for high-networth investors can all help improve investors’ after-tax portfolio performance.
Bond investing in a rising rate environment
Kathleen Gaffney, February 2014
After a transitional year like 2013, when a multidecade declining rate environment moved to a rising rate environment, we think it is important for investors to consider a multisector approach to finding value in the bond market. Finding bonds that can appreciate in price regardless of the interest-rate environment is what a multisector strategy generally seeks to accomplish. With interest rates still near historic lows and many bond investors concerned that yields will rise as ultra-accommodative monetary policy by the Federal Reserve (the Fed) comes to an end, we believe it makes sense to hunt for good relative values across a broad range of asset classes, particularly in nontraditional places.
Floating-rate loans: Core value remains as the need for selectivity rises
Scott Page, Craig Russ, Christopher Remington; January 2014
The strategic case for the floating-rate loan asset class has historically centered on the securities’ combination of attractive yield potential and near-zero duration, delivered through senior/secured obligations – debt that typically has the highest priority of claims in an issuer’s capital structure and is secured by specific collateral. With the asset class experiencing strong investor interest and inflows in 2013, we examine a number of considerations that have arisen to determine if the case, indeed, remains valid. These include: valuation, Libor floors, credit risk, covenant-lite issuance, an expanding retail investor base, TXU, and new regulations.
Important dates to watch in 2014
Andrew H. Friedman, January 2014
Looking forward into 2014, four dates – February 7, March 31, April 15 and November 4 – stand out as pivot points for events that could affect the markets, particular industries, and tax and financial planning.
New Year, Same Higher Taxes
Investors may be cheering a strong year of stock gains in 2013, but a rude surprise may be right around the corner. For 2013, the combined effect of several tax increases (capital gains, health care and reinstated limitations) will increase the tax burden on many investors by nearly 60%. These higher tax rates will remain in effect for 2014, so mitigating the tax drag on investment returns will continue to be a top priority for investors. We begin our look at what taxpayers can expect with a summary of the new 2013 tax rates.
Key Investment Themes for 2014
Richard Bernstein, January 2014
Richard Bernstein annually publishes a list of investment themes that he believes are critical for the coming year.
Is your inflation protection really protecting you?
Thomas Luster, Stewart Taylor, Kevin Dachille, December 2013
Many investors who own Treasury Inflation-Protection Securities (TIPS) and TIPS mutual funds don’t realize that they may be taking a significant amount of interest-rate risk in exchange for their inflation protection, which may result in losses when rates begin to rise rapidly. Investors may consider an inflation-protection investment strategy that avoids longer-term TIPS and seeks real returns through a strategy of using shorter-maturity TIPS and other shorter-duration assets, like floating-rate loans.
Unresolved Issues Dominate as Washington Enters 2014
Andrew H. Friedman, November 2013
The compromise Congress reached to reopen the federal government and permit the United States to borrow funds kicked the can down a very short road. It set up a bipartisan committee to agree on an appropriations plan to finance government operations through 2014. If that committee fails to agree, then on January 15, 2014, Congress can agree to permit the next round of across-the-board spending cuts (known as “sequestration”) to take effect. If Congress fails to agree on the implementation of these cuts, then the government will shut down again.
Portfolio Manager Viewpoints: Craig Brandon, CFA, on Municipal Floating-Rate Securities
Craig Brandon, November 2013
On August 19, 2013, Eaton Vance Floating-Rate Municipal Income Fund (the Fund) became the first floating-rate municipal income mutual fund offered to U.S. investors. By prospectus, the Fund is predominantly:
- Floating-rate: At least 80% of the Fund must be invested in municipal floating-rate obligations, consisting of municipal floating-rate bonds and “synthetic” municipal floating-rate bonds — i.e., fixed-rate municipal bonds with an interest-rate swap that swaps the fixed rate to a floating rate.
- Tax exempt: At least 80% of Fund assets must be exempt from federal income taxes.
- Investment grade: At least 75% of Fund assets must be rated investment grade at the time of investment.
A Last Minute Deal Averts Default – For Awhile
Andrew H. Friedman, October 2013
With the deadline for the United States to avoid defaulting on its debt fast approaching, Congress reached another late-night compromise to reopen the government and raise the nation’s debt limit. The deal also called for yet another bipartisan committee to try to set a budget for future government spending. Before discussing what that committee is likely to do, let’s compare the predictions I’ve been making since early this year against the reality of what ultimately occurred.
Size is a Key Potential Advantage in the Municipal Bond Market
Ralph Studley, October 2013
Individual investors and financial advisors who seek to assemble a municipal bond portfolio on their own are required to navigate a highly fragmented market and assess a myriad of macroeconomic and fundamental factors. But finding the right security is only half the battle. Although independent credit research is a vital component of the selection process, it doesn’t guarantee that an investor will trade a municipal bond at the best possible price.
The Federal Government Shuts Down: Now What Happens?
Andrew H. Friedman, October 2013
Washington insanity reached new heights yesterday as Congress failed to agree on an appropriations bill to keep the federal government running, even though it had known about the September 30 deadline for over six months. This inaction brings Washington dysfunction to a new high (or low). Up until now, Congress had arrived at each fiscal precipice and averted catastrophe with a compromise. Now, finally, Congress has gone over the edge.
5 Reasons to Consider Municipal Bonds Today
Municipal Insight Committee, September 2013
- Tax-equivalent yields have appeared to be attractive relative to corporates
- Munis have offered the highest yields since 2011
- Credit quality spreads have widened
- In recent history, long munis have rallied during periods of rising short-term interest rates
- Muni defaults have remained at low levels
Congress Returns from Recess to Face Fiscal Deadlines
Andrew H. Friedman, September 2013
Congress returns from its August recess facing two imminent deadlines. First, Congress has appropriated funds to keep the federal government operating only through September 30, 2013. If Congress does not appropriate additional funds during September, on October 1 the federal government will shut down. House Speaker Boehner has said he will propose short-term “stop gap” legislation without conditions that would fund the federal government for a few more months at 2013 levels. If Congress adopts such a resolution, the funding deadline will be pushed later into 2013.
Taking stock of concentrated equity positions
Eaton Vance High-Net-Worth Solutions, August 2013
Whether acquired through an employer, inheritance or some other means, many high-net-worth clients have a substantial portion of their assets concentrated in a single stock that has risen in value.
Japan – The land of the rising stock market
Richard Bernstein, August 2013
We have been ardent bulls on the Japanese stock market since last fall. Our thesis has been a simple one: For the first time in the history of our data, Japan began running consecutive monthly current account deficits.
The unloved bull market: Richard Bernstein on the U.S. equity rally
Richard Bernstein, June 2013
The U.S. equity market has seen quite a rally in 2013. Both the Dow Jones Industrial Average and the S&P 500 Index eclipsed their 2007 record closing highs in the first quarter and are up 17.4% and 16.7%, respectively, year-to-date as of May 15, 2013. Additionally, the S&P 500 has risen more than 140% from its bear market low on March 9, 2009, having done so against a slowgrowth economic backdrop.1
1 Source: Factset. The Dow Jones Industrial Average is a price-weighted average of 30 U.S. blue-chip stocks traded on the New York Stock Exchange and the NASDAQ. The S&P 500 Index is an unmanaged index of large-cap stocks commonly used as a measure of U.S. stock market performance. Index performance is historical and not indicative of future results. It is not possible to invest directly in an index.
What’s behind California’s budget improvement – and will it last?
Municipal Insight Committee, May 2013
The recent combination of an improving California economy and higher state tax rates under Proposition 30 is expected to generate additional revenues and budget surpluses, potentially allowing the state to reduce its “Wall of Debt” in the short term.